大浩浩的笔记课堂——FRM考试学习笔记130

Topic 59Basel Ⅲ and Other Crisis Changes

1.The Basel Ⅲ(2009.12 first published→2010.12 final vision)

⑴The Basel Ⅲ changes:

①problems in the recent financial crisis:

A.excessive on- and off-balance sheet leverage

B.a gradual erosion of the amount of capital and the quality of the capital base

C.insufficient liquidity at many banks

D.the system was not set up to handle major off-balance sheets risks or derivative-related exposures

E.the systematic risk that resulted from interconnectedness of commercial and investment banks

F.procyclical deleveraging

G.a loss of confidence in the banking system

②reforms of the Basel Ⅲ regulations:

A.raising capital standards,both in terms of quality and quantity:

It increased capital requirements for credit risk and tightened the definition of what qualifies as tier 1 and tier 2 capital.

B.strengthening risk coverage of capital for trading books and complex off-balance sheet exposures

C.requiring leverage ratio to supplement capital requirements

D.promoting counter cyclical buffers during financial shocks

E.instituting policies to address systemic risk and interconnectedness

F.instituting global liquidity standard,both in terms of liquidity funding and monitoring metrics

⑵The Basel Ⅲ regulations:

①capital definition and requirements(2018.1.1):

A.bank´s capital framework:

a/ tier 1 equity capital(core tier 1 equity capital)

b/ additional tier 1 capital

c/ tire 2 capital

·特别注意！

·There is no tier 3 capital.

B.bank´s capital including:

a/ tier 1 equity capital(″going concern capital″):

△share capital and retained earnings

△excluding goodwill or deferred tax assets

b/ additional tier 1 capital:

such as non-cumulative preferred stock

·特别注意！

·So the tier 1 capital must be adjusted downward to reflect deficits in DB plans.

c/ tire 2 capital(″gone concern capital″):

△debt that is subordinated to depositors with an original maturity of 5 years

△some preferred stock,such as cumulative perpetual preferred

C.bank´s capital requirements:

a/ tier 1 equity capital:

It must be at least 4.5% of risk-weighted assets at all times.

b/ total tier 1 capital:

It must be at least 6% of risk-weighted assets at all times. 

c/ total capital:

It must be at least 8% of risk-weighted assets at all times. 

·特别注意！

·The Basel committee also calls for more capital for systemically important banks.

②capital conservation buffer(2016.1.1→2019.1.1):

A.It protects banks in times of financial distress,the bank will draw on this buffer during periods of financial distress.

B.The Basel Ⅲ requires a capital conservation buffer in normal times consisting of a further amount of core tier 1 equity capital equal to 2.5% of risk-weighted assets.(4.5%→7.0%)

C.Dividend payments are constrained when the buffer is wholly or partially used up.

③countercyclical buffer(2016.1.1→2019.1.1):

A.The buffer is intended to dampen the effect of procyclical amplification and provide protection for the cyclicality of bank earnings.

B.The buffer can be set to between 0% and 2.5% of total risk-weighted assets and must be met with tier 1 equity capital.（基本规则各国自行订制）

·特别注意！

·Banks that do not meet the capital conservation buffer or countercyclical buffers will be subject to constraints on capital distribution of dividends,stock repurchases,and discretionary bonuses to staff.

·特别注意！

·总结

④operational risk management:

A.gross loss ＆ net loss:

a/ gross loss:

The Basel Committee defines gross loss at the loss before any recoveries are made.

b/ net loss:

A net loss is the loss after recoveries are accounted for. 

B.selecting internal loss reference dates are including:

a/ the date of the event´s occurrence

b/ the date of discovery

c/ the date of contingent liability

d/ the date of the settlement

C.operational risk management framework(ORMF) ＆ operational risk measurement system(ORMS):

a/ validation:

It provides assurance of the integrity of the inputs in AMA operational risk capital models.

b/ verification:

It is conducted by internal and/or external audits.

⑤leverage ratio(2015.1.1):

A.regulation:

The Basel Ⅲ specifies a minimum tier 1 leverage ratio of 3%.

B.formula:

C.exposure measure:

a/ definition:

Total exposure includes all items on the balance sheet in their entirely and some off-balance sheet items such as loan commitments.

b/ formula:

total exposure measure=on-balance-sheet exposures+derivatives exposures+securities financing transaction exposures+off-balance-sheet items

⑥systematic risk management:

The Basel Committee is considering several options for dealing with systematic important institutions.

⑦liquidity riskmanagement(2015.1.1→2019.1.1;2018.1.1):

A.liquidity coverage ratio(LCR):

a/ the goal:

△To ensure banks have adequate,high-quality liquid assets to survive short-term stress scenario.

△To promote short-term resilience of a bank´sliquidity profile.

b/ the formula:

c/ accurate stress:

downgrade of the bank´s debt:

△a partial loss of deposits

△a complete loss of wholesale funding

△increased haircuts on secured funding

△drawdowns on lines of credit

B.net stable funding ratio(NSFR):

a/ the goal:

△To protect banks over a longer time horizon than LCR(to cover year).

△To promote resilience over a longer time frame(over a period of 1 year),creating incentives for banks to fund activities with more stable sources of funds. 

b/ the formula:

c/ the weight:

△available stable funding factor(ASF):

△required stable funding factor(RSF):

C.common metrics:

The Basel Committee has developed a set of common metrics to monitor global liquidity risks.

D.liquidity monitoring tools:

They are including contractual maturity mismatch,concentration of funding,available unencumbered assets,liquidity coverage ratio by significant currency,market-related monitoring tools.

⑧counterparty credit riskcoverage:

Reforms are intended to address counterparty credit risk(CCR),credit value adjustments(CVA) and wrong-way risk:

A.It requires the CVA risk arising from changing credit spreads to be a component of market risk capital.

B.The CVA for a counterparty can change:

a/ the market variables underlying the value of the derivatives entered into with the counterparty change

b/ the credit spreads applicable to the counterparty´s borrowing change

⑶G-SIBs,SIFE and D-SIBs:

①definition:

A.G-SIB→global systemically important bank

B.SIFE→systemically important financial institution

C.D-SIB→domestic systemically important bank

②regulation:

Basel committee calls for more tier 1 equity capital for G-SIBs:

+1%,+1.5%,+2%,+2.5% or +3% RWA

2.Contigent convertible bonds(cocos):

⑴the definition:

Cocos are different in that way automatically get converted into equity when certain conditions are satisfied then company is experiencing financial difficulties.

⑵the triggers:

①the ratio of tier 1 equity to RWA

②the ratio of the market value of equity to book value of assets

⑶the characteristic:

Cocos(prior to conversion) qualify as additional tier 1 capital if the trigger is set at 5.125% or higher,otherwise they qualify as tier 2 capital.

3.Dodd-FrankWall Street Reform and Dodd-FrankAct:

⑴definition:

The Dodd-FrankWall Street Reform and Dodd-FrankAct(Consumer Protection Act) was signed into law in July 2010.

⑵aim:

The aim of Dodd-Frank Act is to prevent future bailouts of financial institutions and to protect the consumer.

⑶objective:

An important objective of legislators post-crisis is to increase 

transparency of derivatives markets.

⑷changes:

Some of the major changes are including:

①the establishment of the Financial Stability Oversight Council(FSOC) to look out for risks that affect the entire financial system

②the establishment of the Office of Financial Research(OFR) to identifies risks to the financial stability

③the FSOC and the OFR are charged with identifying systemically important financial institutions(SIFIs)

④the elimination of the Office of Thrift Supervision

⑤the expansion of the Federal Deposit Insurance Corporation(FDIC)´s powers to liquidate banks

⑥the establishment of the Volcker Rule

⑦the Bureau of Financial Protection was created

⑧increased regulation and improved transparency for OTC derivatives

4.Sound management of risks related to money laundering(ML) and financing of terrorism(FT):

⑴regulation introduction:

All banks should be required to "have adequate policies and processes,including strict customer due diligence(CDD) rules to promote high ethical and professional standards in the banking sector and prevent the bank from being used,intentionally or unintentionally,for criminal activities".

⑵essential elements:

①assessment,understanding,management and mitigation of risks:

A.assessment and understanding of risks

B.proper governance arrangements

C.the 3 lines of defence:

a/ the business units(1st):

Such as front office,customer-facing activity,they are in charge of identifying,assessing and controlling the risks of their business.

b/ the chief officer(2nd):

Who are incharge of anti money laundering(AML) and counter financing of terrorism(CFT),the compliance function but also human resources or technology.They should engage in ongoing monitoring and the fulfillment of AML and CFT duties.

c/ internal audit function(3rd):

A bank should establish policies for conducting internal audits of the bank´s AML and CFT policies.

D.adequate transaction monitoring system

②customer acceptance policy:

Such as clear customer acceptance policies and procedures that identify the types of customers.

③customer and beneficial owner identification,verification and risk profiling:

The customer due diligence should be applied not only to customers but also to persons acting an their behalf and beneficial owners.

④ongoing monitoring

⑤management of information:

A bank should ensure that all information obtained in the context of CDD is recorded and updated,it also should supply all information to the supervisors. 

⑥reporting of suspicious transactions and asset freezing

⑦So,the bank must have policies and procedures for: 

A.customer identification

B.customer due diligence(CDD)

C.customer acceptance

D.monitoring of business relationships

E.monitoring of business operations

⑶group-wide and cross-border:

AML and CFT in a group-wide and cross-border context:

①global process for managing customer risks

②risk assessment and management:

Banks without sound ML and FT risk management practices are exposed to serious risks such as reputation risk,operational risk,compliance risk and concentration risk.

③consolidated AML/CFT policies and procedures

④group-wide information-sharing

⑤mixed financial groups

⑥cross-border:

Banks involved in cross-border activities should:

A.integrate information on the customer,beneficial owners of the customer(if one exists) and the fund involved in the transactions

B.monitor significant customer relationships,balance,and activity on a consolidated basis whether the account is on- or off-balance sheet,as assets under management(AUM) or on a fiduciary basis

C.appoint a chief AML or CFT officer for the whole group(the group of banks and branches that are part of one financial organization) who must ensure group-wide compliance(across borders) of AML or CFT requirements.

D.oversee the coordination of group-wide information sharing:

The head office should be informed of information regarding high-risk customers,and local data protection and privacy laws must be considered.

⑷the role of supervisors:

①Banking supervisors are expected to set out supervisory expectations governing bank´s AML and CFT policies and procedures.

②Banking supervisors should adopt a risk-based approach to supervising bank´s ML and FT risk management systems.

③Banking supervisors have a duty to ensure their banks maintain sound ML and FT risk management not only to protect their own safety and soundness but also to protect the integrity of the financial system.

⑸banks determination:

Banks must determine which customers pose a high risk of ML and FT:

①factors should be considered:

A.customer´s background

B.customer´s occupation

C.customer´s sources of income ＆ wealth

D.customer´s country of origin ＆ country of residence:

Customer identification documentation may include passports,identity cards,driving licenses and account files like financial transaction records or business correspondence.

E.the choice and use of the the bank´s products ＆ services

F.the nature and purpose of the bank account

G.customer´s any linked accounts

②notice should be considered:

A.Banks must according to the Financial Action Task Force(FATF) standards,identify customers and verifying their identities and they must establish a systematic procedure.

B.In some cases,the bank must identify and verify a person acting on behalf of beneficial owners.

C.Enhanced due diligence may be required for:

a/ accounts with large balances and regulated cross-boarder wire transfers

b/ a politically exposed person(PEP),especially foreign PEPs

③reliance on a third party:

A.In some cases,banks rely on third parties to perform CDD.The FATF standard allow banks to rely on third parties:

a/ identify the customer and verify the customer´s identity using reliable independent information

b/ identify and verify the identity of the beneficial owner

c/ understand and obtain information on the purpose and the internal nature of the business relationship with the customer

B.However,reliance on a third party does not relieve the bank of its responsibilities in terms of CDD and other AML or CFT requirements on customers.

④outsourcing agency:

Banks may engage in CDD directly or outsource the activity,sometimes in an agent relationship.If outsourced,it does not relieve the bank of its compliance responsibilities,which sill lie with the bank.

⑤correspondent bank:

A.Correspondent banking relationships allow the respondent bank to provide services that it could not provide otherwise.

B.Risk indicators arising from cross-border correspondent baking include the inherent risks resulting from the nature of the services provided by the correspondent bank including the characteristics of the respondent bank,which involve the respondent bank´s major business and the environment in which the respondent bank operates.

C.Nested(or downstream) refers to the use of correspondent banking services by a number of respondent banks through the relationship with the correspondent bank´s direct respondent bank to conduct financial transactions and gain access to services.

D.The foreign institutions(respondent banks) are not customers of the correspondent bank and,as they are not known,may increase ML or FT risks,the respondent bank should,therefore,disclose whether accounts include nested relationships and monitoring accordingly.

E.In cross-border wire transfer,the Basel Committee encourages all banks to apply high transparency.

F.Payment messages must be in the correct form and must identify the originator and the beneficiary of the payment,and then must be monitored by those in the payment chain.

大浩浩的笔记课堂之FRM考试学习笔记合集