大浩浩的笔记课堂——FRM考试学习笔记128

Topic 57 Basel Ⅱ

1.The Framework of Basel Ⅱ:

⑴the progress:

1999.6 born→2001.1＆2003.4 revised→2004.6 published→2005.11 updated→2007 began

⑵three Pillars:

①Pillar 1:minimum capital requirements:

Banks should maintain a minimum level of capital to cover credit risk,market risk and operational risk:

total capital=8%×(credit risk RWA+market risk RWA+operational risk RWA)

②Pillar 2:supervisory review process:

Banks should access the adequacy of capital relative to risk,and supervisors should review and take corrective action if problems occur:

Allow regulators from different countries some discretion in how they apply the rules.

③Pillar 3:market discipline:

Risks should be adequately disclosed in order to allow market participants to access a bank´s risk profile and the adequacy of its capital:

A.to increase transparency

B.to disclose more information about the risks and the accurateness of its capital

⑶the improvement:

capital adequacy ratio(CAR):

增加了新的风险加权资产核算方法，故风险敏感度大大提高：

①信用风险：

增加了内部评级法，风险加权资产是由PD，EAD，LGD和期限一系列变量决定的复杂函数。

②市场风险：

增加了内部模型法，资本要求根据内部模型核算出的10日风险价值3至4倍确定。

③操作风险：

根据各业务部门基准风险水平的简单核算，但也有高级计量方法。

⑷the goal:

A primary goal of Basel Ⅱ is to achieve overall consistency in the application of the capital requirements across countries while at the same time,giving supervisors direction to consider market conditions in their own country.

2.The Pillar 1 of Basel Ⅱ:

⑴the capital of Basel Ⅱ:

①capital items:

A.tier 1 capital("core" capital):

a/ equity capital:

common stock and nonredeemable,noncumulative preference shares

b/ disclosed reserves:

share premiums,retained profits,and general reserves

c/ goodwill(deducted)

B.tier 2 capital("supplementary" capital):

a/ undisclosed reserves:

They are reserves that passed through the earnings statement but remain unpublished.

b/ asset revaluation reserves

c/ general loan-loss provision:

It is held against future unidentified losses.

d/ hybrid debt capital instruments:

They are combining some characteristics of equity and of debt such as cumulative perpetual preferred stock and certain types of 99-year debenture issues.

e/ subordinated term debt:

The minimum original maturity is 5 years.

C.tier 3 capital:

e.g.the short-term subordinated debt covering market risk with a maturity of at least 2 years

②capital requirements:

A.formula:

B.regulation:

a/ At least 50% of capital must be tier 1,and it means that there is a 4% tier 1 capital to risk-weighted assets requirement.

b/ Half of the tier 1 requirement has to be met with common equity,it means that there is a 2% common equity to risk-weighted assets requirement.

③asset categories:

A.credit risk assets:

a/ bank assets:

△banking book(held to maturity)

△trading book(marked-to-market)

b/ all derivatives

B.market risk:

a/ currencies

b/ commodities

c/ fixed-income

d/ equities

C.operational risk

④allowed approaches:

·特别注意！

·Basel Ⅱ improves on Basel Ⅰ in at least 2 ways:

*Counterparty credit ratings are considered in calculating risk-weighted assets.

*A model of default correlations are included.

⑵the credit risk capital under Basel Ⅱ:

①the standardized approach:

A.definition:

It incorporates risk weights based on external credit rating assessment.The amount of capital that a bank must hold is specific to the risk of credit-risky assets,the type of institution the claim is written on,and the maturity of those assets.

B.rules:

The standard rule for retail lending is that a risk weight of 75% be applied.(e.g.residential mortgage 35%)

C.table:

·特别注意！

·A bank can remove these assets from its balance sheet only after a true sale.

D.collateral adjustment:

a/ the simple approach:

△The risk weight of the counterparty is replaced by the risk weight of the collateral for the part of the exposure covered by the collateral:

e.g.E(80),C(70)→0.5×70+1.5×(80-70)=50

△The collateral must be revalued at least every 6 months,and must be pledged for at least the life of the exposure.

b/ the comprehensive approach:

Banks adjust the size of their exposure upward to allow for possible increases in the exposure and adjust the value of the collateral downward to allow for possible decreases in the value of the collateral:

e.g.E(80)＆+10%,C(70)＆-15%→(1+10%)×80-(1-15%)×70=28.5,1.5×28.5=42.75

②the internal ratings-based(IRB) approaches:

A.definition:

They use a bank´s own internal estimates of creditworthiness to determine the risk weightings in the capital calculations.

B.characteristics:

Regulators base the capital requirement on the value at risk calculated using a 1-year time horizon and 99.9% confidence level.

C.formula:

a/ WCDR:worst-case default rate

b/ MA:maturity adjustment

D.categories:

a/ foundation IRB(FIRB):

Bank estimates the probability of default(PD).

b/ advanced IRB(AIRB):

Bank estimates not only PD,but also loss given default(LGD),exposure at default(EAD),and effective maturity(M). 

E.model:

asymptotic single risk factor(ASRF) model:

a/ based on:

The capital requirement is based on a VaR calculated over a 1-year time horizon and a 99.9% confidence level.

b/ risk factors:

All systematic risks are modeled by a single risk factor and all idiosyncratic

(unsystematic) risks tend to cancel out. 

c/ asset correlations:

△Asset correlations increase with firm size.

△Asset correlations decrease with higher PDs as higher PDs suggest more idiosyncratic risk.

d/ maturity adjustment:

△Under the FIRB,the effective maturity is assumed to be 2.5 years.

△Under the AIRB,the effective maturity is calculated individually based on PD. 

e/ LGD of FIRB:

△LGD at 45% for senior claims and 75% for subordinated claims.

△If there is collateral,the LGD is reduced using the comprehensive approach described earlier.

F.alternative:

guarantees and credit derivatives:

As an alternative to using the credit substitution approach,the capital requirement can be calculated as the capital that would be required without the guarantee multiplied by:

0.15+160×PD_g(PD_gis the 1-year probability of default of the guarantor.)

G.securitization:

A bank can remove these asset securitization from its balance sheet only after a true sale:

a/ external ratings-based approach(RBA)

b/ supervisory formula(SF)

c/ internal assessment approach(IAA)

⑶the market risk capital under Basel Ⅱ:

①standardized measurement approach:

A.definition:

It assigns a capital separately to each of the items in the trading book.

B.formula:

C.characteristics:

a/ It simply sums the market risk across the market-risk categories.

b/ It ignores correlations between the instruments.

D.usage:

Banks with less sophisticated risk management processes are more likely to use this approach.

②internal models approach:

A.definition:

It is approach that calculates a VaR measure,capital charges are generally lower using this approach because it better reflects the benefits of diversification.

B.formula:

the capital requirement for market risk=max(VaR_t-1,m_c×VaR_avg)+SRC

a/ VaR_t-1:previous day´sVaR

b/ VaR_avg:the average VaR over the past 60 trading days

c/ m_c:multiplicative factor,最小值为3

The bank supervisor has discretion regarding the multiplier.

d/ SRC:specific risk charge

The VaR model does not incorporate company-specific risks such as changes in a firm´scredit spread or changes in a company´sstock price.

C.parameters:

a/ time horizon:

There is a horizon of 10 trading days,banks can scale their daily VaR by the square root of time.

b/ confidence interval:

There is a 99% confidence interval.

c/ observation period:

An observation period based on at least a year of historical data,the 2009 revisions require a minimum monthly update.

D.factor:

the multiplicative factor(plus factor):the Basel penalty zones

⑷The operational risk capital under Basel Ⅱ:

①the basic indicator approach(BIA,the simplest):

A.formula:

the capital requirement for operational risk=

15%×the bank´s average annual gross income over the last 3 years

B.note:

If negative gross revenues are experienced in a previous year,that year is not counted.

②the standardized approach(TSA):

Bank´sactivities are divided into 8 business lines:

A.formula:

B.lines:

③the advanced measurement approach(AMA,the most complex):

A.definition:

It uses its own internal models to calculate the operational risk loss that it is 99.9% certain will not be exceeded in 1 year.

B.formula:

The capital requirement for operational risk is equal to the unexpected loss in a total loss distribution that corresponds to a confidence level of 99.9% over a 1-year time horizon.

C.approach:

Firms are encouraged to use the loss distribution approach(LDA).

D.advantage:

It allows banks to consider and recognize the risk mitigating factors or impact of insurance contracts subject to certain conditions.

3.The Pillar 2 of Basel Ⅱ:

⑴the risk of Pillar 1:

①第一支柱虽涉及但未完全涵盖的风险：

A.concentration risk

B.risk of credit risk mitigation(CRM)

②第一支柱未涉及的风险：

A.interest rate risk of banking book

B.liquidity risk

C.reputation risk

D.strategic risk

E.business risk

③外部因素：

business cycle

⑵the 4 key principles of Pillar 2:

①principle 1:

Banks need a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.

②principle 2:

Supervisors should review and evaluate banks´internal capital adequacy assessments and strategies,as well as their ability to monitor and ensure their compliance with regulatory capital ratios.

③principle 3:

Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum.

④principle 4:

Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require remedial action if capital is not maintained or restored.

4.The Pillar 3 of Basel Ⅱ:

The third Pillar relates to the disclosure of relevant information so that market discipline(including external review) can come to bear on capital adequacy regulation and other supervisory activities to ensure safety,soundness,and efficient economic activities in the overall banking system and they will make better risk management decisions.

大浩浩的笔记课堂之FRM考试学习笔记合集