2019 Q1 Results
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Basel III: Post-Crisis Reforms
Basel III: Post-Crisis Reforms Implementation Timeline Focus: Capital Definitions, Capital Focus: Capital Requirements Buffers and Liquidity Requirements Basel lll 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 1 January 2022 Full implementation of: 1. Revised standardised approach for credit risk; 2. Revised IRB framework; 1 January 3. Revised CVA framework; 1 January 1 January 1 January 1 January 1 January 2018 4. Revised operational risk framework; 2027 5. Revised market risk framework (Fundamental Review of 2023 2024 2025 2026 Full implementation of Leverage Trading Book); and Output 6. Leverage Ratio (revised exposure definition). Output Output Output Output Ratio (Existing exposure floor: Transitional implementation floor: 55% floor: 60% floor: 65% floor: 70% definition) Output floor: 50% 72.5% Capital Ratios 0% - 2.5% 0% - 2.5% Countercyclical 0% - 2.5% 2.5% Buffer 2.5% Conservation 2.5% Buffer 8% 6% Minimum Capital 4.5% Requirement Core Equity Tier 1 (CET 1) Tier 1 (T1) Total Capital (Tier 1 + Tier 2) Standardised Approach for Credit Risk New Categories of Revisions to the Existing Standardised Approach Exposures • Exposures to Banks • Exposure to Covered Bonds Bank exposures will be risk-weighted based on either the External Credit Risk Assessment Approach (ECRA) or Standardised Credit Risk Rated covered bonds will be risk Assessment Approach (SCRA). Banks are to apply ECRA where regulators do allow the use of external ratings for regulatory purposes and weighted based on issue SCRA for regulators that don’t. specific rating while risk weights for unrated covered bonds will • Exposures to Multilateral Development Banks (MDBs) be inferred from the issuer’s For exposures that do not fulfil the eligibility criteria, risk weights are to be determined by either SCRA or ECRA. -
Chapter 5 Credit Risk
Chapter 5 Credit risk 5.1 Basic definitions Credit risk is a risk of a loss resulting from the fact that a borrower or counterparty fails to fulfill its obligations under the agreed terms (because he or she either cannot or does not want to pay). Besides this definition, the credit risk also includes the following risks: Sovereign risk is the risk of a government or central bank being unwilling or • unable to meet its contractual obligations. Concentration risk is the risk resulting from the concentration of transactions with • regard to a person, a group of economically associated persons, a government, a geographic region or an economic sector. It is the risk associated with any single exposure or group of exposures with the potential to produce large enough losses to threaten a bank's core operations, mainly due to a low level of diversification of the portfolio. Settlement risk is the risk resulting from a situation when a transaction settlement • does not take place according to the agreed conditions. For example, when trading bonds, it is common that the securities are delivered two days after the trade has been agreed and the payment has been made. The risk that this delivery does not occur is called settlement risk. Counterparty risk is the credit risk resulting from the position in a trading in- • strument. As an example, this includes the case when the counterparty does not honour its obligation resulting from an in-the-money option at the time of its ma- turity. It also important to note that the credit risk is related to almost all types of financial instruments. -
An Explanatory Note on the Basel II IRB Risk Weight Functions
Basel Committee on Banking Supervision An Explanatory Note on the Basel II IRB Risk Weight Functions July 2005 Requests for copies of publications, or for additions/changes to the mailing list, should be sent to: Bank for International Settlements Press & Communications CH-4002 Basel, Switzerland E-mail: [email protected] Fax: +41 61 280 9100 and +41 61 280 8100 © Bank for International Settlements 20054. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN print: 92-9131-673-3 Table of Contents 1. Introduction......................................................................................................................1 2. Economic foundations of the risk weight formulas ..........................................................1 3. Regulatory requirements to the Basel credit risk model..................................................4 4. Model specification..........................................................................................................4 4.1. The ASRF framework.............................................................................................4 4.2. Average and conditional PDs.................................................................................5 4.3. Loss Given Default.................................................................................................6 4.4. Expected versus Unexpected Losses ....................................................................7 4.5. Asset correlations...................................................................................................8 -
What Do One Million Credit Line Observations Tell Us About Exposure at Default? a Study of Credit Line Usage by Spanish Firms
What Do One Million Credit Line Observations Tell Us about Exposure at Default? A Study of Credit Line Usage by Spanish Firms Gabriel Jiménez Banco de España [email protected] Jose A. Lopez Federal Reserve Bank of San Francisco [email protected] Jesús Saurina Banco de España [email protected] DRAFT…….Please do not cite without authors’ permission Draft date: June 16, 2006 ABSTRACT Bank credit lines are a major source of funding and liquidity for firms and a key source of credit risk for the underwriting banks. In fact, credit line usage is addressed directly in the current Basel II capital framework through the exposure at default (EAD) calculation, one of the three key components of regulatory capital calculations. Using a large database of Spanish credit lines across banks and years, we model the determinants of credit line usage by firms. We find that the risk profile of the borrowing firm, the risk profile of the lender, and the business cycle have a significant impact on credit line use. During recessions, credit line usage increases, particularly among the more fragile borrowers. More importantly, we provide robust evidence of more intensive use of credit lines by borrowers that later default on those lines. Our data set allows us to enter the policy debate on the EAD components of the Basel II capital requirements through the calculation of credit conversion factors (CCF) and loan equivalent exposures (LEQ). We find that EAD exhibits procyclical characteristics and is affected by credit line characteristics, such as commitment size, maturity, and collateral requirements. -
Internal Rating Based Approach- Regulatory Expectations
1 Internal Rating Based Approach- Regulatory Expectations Ajay Kumar Choudhary General Manager Department of Banking Operation and Development Reserve Bank of India What was Basel 2 designed to achieve? • Risk sensitive minimum bank capital requirements • A framework for formal dialogue with your regulator • Disclosures to enhance market discipline 3 Basel II • Implemented in two stages. • Foreign banks operating in India and the Indian banks having operational presence outside India migrated to Basel II from March 31, 2008. • All other scheduled commercial banks migrated to these approaches from March 31, 2009. • Followed Standardized Approach for Credit Risk and Basic Indicator Approach for Operational Risk. • As regards market risk, banks continued to follow SMM, adopted under Basel I framework, under Basel II also. • All the scheduled commercial banks in India have been Basel II compliant as per the standardised approach with effect from April 1, 2009. 4 Journey towards Basel II Advanced Approaches • In July 2009, the time table for the phased adoption of advanced approaches had also been put in public domain. • Banks desirous of moving to advanced approaches under Basel II have been advised that they can apply for migrating to advanced approaches of Basel II for capital calculation on a voluntary basis based on their preparedness and subject to RBI approval. • The appropriate guidelines for advanced approaches of market risk (IMA), operational risk (AMA) and credit risk (IRB) were issued in April 2010, April 2011 and December 2011 respectively. 5 Status of Indian banks towards implementation of Basel II advanced approaches • Credit Risk • Initially 14 banks had applied to RBI for adoption of Internal Rating Based (IRB) Approaches of credit risk capital calculation under Basel II framework. -
Practical Application Examples from the IAA Banking Webinar
INTERNATIONAL ACTUARIAL ASSOCIATION Practical Application Examples for the Banking Webinar 29 March 2017 16:00 SAST, 15:00 BST 1. Practical Application: Expected Credit Loss Modelling where actuarial and statistical principles are heavily applied. Expected Loss = PD x LGD x EAD Estimating Probability of Default (“PD”) • One common methodology for estimating the PD is to develop a rating scorecard, which aims to assign scores to borrowers based on a list of factors. These scorecards can be “application” or “behavioural” in nature, and hence the factors captured will reflect different characteristics. Application scorecards are used at the point of origination, and therefore look to capture the default risk on new loans, while behavioural scorecards look to capture risks on loans that have been on the book for at least 6 months. • Scorecard models are usually based on regression equations with a logit link, so as to restrict the PD between 0 and 1. Alternatively, a linear or non-linear equation can be used to derive the score, which is then mapped to the Bank’s estimate of PD using a matrix. For example, a score of 700 may refer to a PD of 2%. • Another common methodology is to use a roll-rate or transition matrix approach. Under this approach, the Bank will measure the migrations (between credit ratings, or delinquency indicators) over a fixed observation window. The same group of loans is therefore monitored from the start of the period to the end to obtain the proportions moving from one state to the next. The Bank is then able to estimate the likelihood of a loan in any state moving to another state, in this case default. -
Risk-Weighted Assets and the Capital Requirement Per the Original Basel I Guidelines
P2.T7. Operational & Integrated Risk Management John Hull, Risk Management and Financial Institutions Basel I, II, and Solvency II Bionic Turtle FRM Video Tutorials By David Harper, CFA FRM Basel I, II, and Solvency II • Explain the motivations for introducing the Basel regulations, including key risk exposures addressed and explain the reasons for revisions to Basel regulations over time. • Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines. • Describe and contrast the major elements—including a description of the risks covered—of the two options available for the calculation of market risk: Standardized Measurement Method & Internal Models Approach • Calculate VaR and the capital charge using the internal models approach, and explain the guidelines for backtesting VaR. • Describe and contrast the major elements of the three options available for the calculation of credit risk: Standardized Approach, Foundation IRB Approach & Advanced IRB Approach - Continued on next slide - Page 2 Basel I, II, and Solvency II • Describe and contract the major elements of the three options available for the calculation of operational risk: basic indicator approach, standardized approach, and the Advanced Measurement Approach. • Describe the key elements of the three pillars of Basel II: minimum capital requirements, supervisory review, and market discipline. • Define in the context of Basel II and calculate where appropriate: Probability of default (PD), Loss given default (LGD), Exposure at default (EAD) & Worst- case probability of default • Differentiate between solvency capital requirements (SCR) and minimum capital requirements (MCR) in the Solvency II framework, and describe the repercussions to an insurance company for breaching the SCR and MCR. -
The Operational Risk Framework Under a Retail Perspective
CAPITAL REQUIREMENTS The Operational Risk Framework under a Retail Perspective by Niclas Hageback asel II’s double-counting rule may reduce the AMA capital charge for retail banks more than the regulators have expect- Bed. The purpose of this article is to encourage retail banks to better analyze their pool of loss data through a PD/LGD/EAD filter to help find the actual ratio between pure operational risk losses and credit-related operational risk losses. The goal is to be in a better position to decide on a capital approach and to take a more holistic view on operational risk and credit risk mitigants. n analysis of pools of risk-related contents, the larg- charge based on three different operational risk loss data er part of the operational risk calculation methodologies: 1) the A has shown that a consider- losses that would form the Basic Indicator Approach; 2) the able number of retail-banking- basis of the historical loss dis- Standardized Approach; and 3) related operational risk losses tribution and the scenario the AMA. affect the credit risk capital analysis calculation under The two first methodologies charge. You might ask, “So what?” AMA are excluded. are based on the assumption that According to Basel II, such losses 2. From a practical point of view, operational risk correlates with should be excluded from the oper- it makes sense for a retail the size of the financial institu- ational risk capital calculation bank to closely coordinate and tion; the only way to lower the under the Advanced Measurement integrate the credit risk man- capital charge is by lowering the Approach (AMA) to avoid “double agement and operational risk size of gross income, which is a counting.” Hence, a bank with a management functions, as perverse incentive for managing retail-related focus needs to be operational risk mitigants can the risk-reward relationship. -
Credit Risk Measurement: Avoiding Unintended Results Part 1
CAPITAL REQUIREMENTS Credit Risk Measurement: Avoiding Unintended Results Part 1 by Peter O. Davis his article—the first in a series—provides an overview of credit risk measurement terminology and a basic risk meas- Turement framework. The series focuses on credit risk measurement concepts, how they are implemented, and potential inconsistencies between theory and application. Subsequent articles will present common implementation options for a given concept and examine how each affects the credit risk measurement result. he basic concepts of Trend Toward Credit Risk scorecards to lower underwriting credit risk measure- Quantification costs and improve portfolio man- T ment—default probabili- As credit risk modeling agement. Quantification of com- ty, recovery rate, exposure at methodologies have improved mercial credit risk has moved for- default, and unexpected loss—are over time, banks have incorporat- ward at a slower pace, with a sig- easy enough to describe. But even ed models into risk-grading, pric- nificant acceleration in the past for people who agree on the con- ing, portfolio management, and few years. The relative infre- cepts, it’s not so easy to imple- decision processes. As the role of quency of defaults and limited ment an approach that is fully credit risk models has grown in historical data have constrained consistent with the starting con- significance, it is important to model development for commer- cept. Small differences in how understand the different options cial credit risk. credit risk is measured can result for measuring individual credit Although vendors offer in big swings in estimates of cred- risk components and relating default models for larger (typically it risk—with potentially far-reach- them for a complete measure of public) firms, quantifying the risk ing effects on risk assessments credit risk. -
Basel III: Comparison of Standardized and Advanced Approaches
Risk & Compliance the way we see it Basel III: Comparison of Standardized and Advanced Approaches Implementation and RWA Calculation Timelines Table of Contents 1. Executive Summary 3 2. Introduction 4 3. Applicability & Timeline 5 3.1. Standardized Approach 5 3.2. Advanced Approaches 5 3.3. Market Risk Rule 5 4. Risk-Weighted Asset Calculations 6 4.1. General Formula 6 4.2. Credit Risk 6 4.3. Market Risk 12 4.4. Operational Risk 13 5. Conclusion 14 The information contained in this document is proprietary. ©2014 Capgemini. All rights reserved. Rightshore® is a trademark belonging to Capgemini. the way we see it 1. Executive Summary In an effort to continue to strengthen the risk management frameworks of banking organizations and foster stability in the financial sector, the Basel Committee for Banking Supervision (BCBS) introduced, in December 2010, Basel III: A global regulatory framework for more resilient banks and banking systems. Subsequently, in July 2013, US regulators introduced their version of the BCBS framework, the Basel III US Final Rule1. The Final Rule, which outlines the US Basel III framework, details two implementation approaches: • The standardized approach • The advanced approaches To help banking clients understand what this means to their businesses, Capgemini has compared and evaluated both approaches, based on: • Implementation timelines as mandated by regulation • Risk-weighted asset (RWA) calculations for credit • Market and operational risks • Applicability to banks of all sizes—large or small A Glass Half Full While the standardized approach of Basel III introduces a more risk-sensitive treatment for various exposure categories than that of Basel II, the advanced approaches add another layer of complexity, by requiring that applicable banks employ more robust and accurate internal models for risk quantification. -
Downturn LGD: a More Conservative Approach for Economic Decline Periods
42 Downturn LGD: A More Conservative Approach for Economic Decline Periods Mauro Ribeiro de Oliveira Júnior Armando Chinelatto Neto Electronic copy available at: http://ssrn.com/abstract=2416500 43 Abstract The purpose of this paper is to identify a relevant sta- tistical correlation between rate of default (RD) and loss given default (LGD) in a major Brazilian financial institution’s Retail Home Equity exposure rated using the IRB approach, so that we may find a causal relationship between the two risk para- meters. Therefore, according to Central Bank of Brazil require- ments, a methodology is applied to add conservatism to the es- timation of the Loss Given Default (LGD) parameter at times of economic decline, reflected as increased rates of default. Keywords: A-IRB, Loss Given Default, Rate of Default. 1. Introduction Financial institutions that wish to aches, and allows larger banks to use the use IRB (Internal Ratings Based) approa- advanced approach based on the internal ches pursuant to the recommendations of rating of exposures according to their cre- the Basel Committee on Banking Supervi- dit risk, that is, the Advanced IRB approa- sion as provided in the document titled "In- ch, to which the literature refers as A-IRB. ternational Convergence of Capital Measu- Central Bank of Brazil Circular Let- rement and Capital Standards: a Revised ter No. 3.581, dated March 8, 2012, addres- Framework", or simply Basel II, must cal- ses the standards governing the use of in- culate the following risk parameters: Pro- ternal credit risk systems. In practice, Cir- bability of Default (PD), Loss Given De- cular Letter No. -
Regulatory Capital Requirements for European Banks
Regulatory Capital Requirements for European Banks Implications of Changing Markets and a New Regulatory Environment July 2009 Table of Contents Chapter 1 – Basics Key Concepts 8 Introduction 10 Basel I Capital Charges 11 Basel II Overview 12 Scope of Application 12 Types of Banks 13 Implementation and Timing 14 IRB Transition Period 15 Basel II – Three Pillars 16 Components of Regulatory Capital 17 Types of Eligible Capital and Provisions 18 Criteria for Recognition of External Ratings 19 Chapter 2 – Capital charges (Pillar 1) Sample Bank 21 Sovereign Exposures 22 Bank Exposures 25 2 Table of Contents (cont’d) Chapter 2 – Capital charges (cont’d) Corporate Exposures 28 Retail Exposures 36 Real Estate Exposures 39 Covered Bonds 43 Specialised Lending 45 Equity 46 Funds 48 Off-Balance Sheet Items 54 Securitisation Exposures 56 Operational Requirements 57 Proposed CRD Amendment – “Significant Credit Risk Transfer” 59 Standardised Banks 61 Ratings Based Approach 61 Most Senior Exposures; second loss positions or better 61 Liquidity Facilities 62 Overlapping Exposures 64 3 Table of Contents (cont’d) Chapter 2 – Capital charges (cont’d) Securitisation Exposures (cont’d) IRB Banks 65 Ratings Based Approach 65 Hierarchy 65 Internal Assessments Approach 67 Supervisory Formula Approach 70 Liquidity Facilities 74 Top-Down Approach 75 Rules for Purchased Corporate Receivables 76 Inferred Ratings 79 BIS Re-securitisation Proposals 80 CRD Retention Rules 83 BIS Other Securitisation Proposals 88 Credit Risk