1Q17 Basel Pillar 3 Report
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Risk Retention Lessons from Credit Card Securitization
Skin-in-the-Game: Risk Retention Lessons from Credit Card Securitization Adam J. Levitin* ABSTRACT The Dodd-Frank Act's "skin-in-the-game" credit risk retention require- ment is the major reform of the securitization market following the housing bubble. Skin-in-the-game mandates that securitizers retain a 5% interest in their securitizations. The premise behind skin-in-the-game is that it will lessen the moral hazard problem endemic to securitization, in which loan originators and securitizers do not bear the risk on the ultimate performance of the loans. Contractual skin-in-the-game requirements have long existed in credit card securitizations. Their impact, however, has not been previously examined. This Article argues that credit card securitization solves the moral hazard problem not through the limited risk retention of formal skin-in-the-game re- quirements, but through implicit recourse to the issuer's balance sheet. Absent this implicit recourse, skin-in-the-game actually creates an incentive misalign- ment between card issuers and investors because card issuers have lopsided upside and downside exposure on their securitized card receivables. For- mally, the card issuers bear a small fraction of the downside exposure, but retain 100% of the upside, should the card balance generate more income than is necessary to pay the investors. The risk/reward imbalance should create a distinct problem because the card issuer retains control over the terms of the credit card accounts. Prior to the Credit CARD Act of 2009, the issuer could increase a portfolio's volatility through rate-jacking: when interest rates and fees are increased,some accounts will pay more and some will default. -
Economic Capital Estimation for Consumer Portfolios
RETAIL RISK Economic Capital Estimation for Consumer Portfolios by Fang Du his article has six sections: 1) an introduction to the general practice related to economic capital; 2) regulatory capital and Tits differences to economic capital; 3) the methodology of estimating the credit risk for consumer portfolios; 4) research results on estimation of default variance-covariance; 5) a focus on the Monte Carlo method by simulating the loss distribution of a portfolio based on the estimated default rate, default rate volatility and default rate covariance between different obligors; and 6) a summary of findings. Both regulatory capital and ures not only show a difference within the same consumer portfo- economic capital focus on a bank’s but also show a dramatic diver- lio is assumed to be homoge- risk of insolvency in the face of gence. neous, regardless of its credit adverse events. A bank, for exam- Most banks currently use a score, loan-to-value (LTV) ratio, ple, maintains regulatory capital or top-down approach to assign eco- debt-to-income ratio, tenure, and economic capital as a financial nomic capital to their consumer sensitivity to macroeconomic con- source to protect itself against portfolios, including residential ditions. In other words, all of the insolvency. Theoretically, regula- mortgages, home equity loans and valuable information reflecting tory and economic capital should lines (also known as closed-end each customer’s creditworthiness converge because both cover the and open-end home equity loans), is ignored under this approach. In asset loss due to credit risk, mar- automobile installment loans, stu- consumer credit, most banks and ket risk, operational risk, interest dent loans, credit cards, and oth- financial services firms commonly risk, reputational risk, and so ers. -
Credit Risk Assessment Using Survival Analysis for Progressive Right-Censored Data: a Case Study in Jordan
Journal of Internet Banking and Commerce An open access Internet journal (http://www.icommercecentral.com) Journal of Internet Banking and Commerce, April 2017, vol. 22, no. 1 CREDIT RISK ASSESSMENT USING SURVIVAL ANALYSIS FOR PROGRESSIVE RIGHT-CENSORED DATA: A CASE STUDY IN JORDAN JAMIL J JABER Department of Risk Management and Insurance, Faculty of Management and finance, University of Jordan, Jordan Tel: +962 6 535 5000; Email: [email protected], [email protected] NORISZURA ISMAIL School of Mathematical Sciences, Faculty of Science and Technology Universiti Kebangsaan Malaysia, Malaysia SITI NORAFIDAH MOHD RAMLI School of Mathematical Sciences, Faculty of Science and Technology Universiti Kebangsaan Malaysia, Malaysia Abstract In credit risk management, the Basel Committee provides a choice of three approaches for financial institutions to calculate the required capital; standardized approach, Internal Ratings-Based (IRB) approach, and Advanced IRB approach. The IRB approach is usually preferred compared to the standard approach due to its higher accuracy and JIBC April 201, Vol. 22, No.1 - 2 - lower capital charges. The objective of this study is to use several parametric models (exponential, log-normal, gamma, Weibull, log-logistic, Gompertz) and non-parametric models (Kaplan-Meier, Nelson-Aalen) to estimate the probability of default which can be used for evaluating the performance of a sample of credit risk portfolio. The models are fitted to a sample data of credit portfolio obtained from a bank in Jordan for the period of January 2010 until December 2014. The best parametric and non-parametric models are selected using several goodness-of-fit criteria, namely MSE, AIC and BIC for parametric models and SE and MAD for non-parametric models. -
Revised Standards for Minimum Capital Requirements for Market Risk by the Basel Committee on Banking Supervision (“The Committee”)
A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf Basel Committee on Banking Supervision STANDARDS Minimum capital requirements for market risk January 2016 A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-399-6 (print) ISBN 978-92-9197-416-0 (online) A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf Minimum capital requirements for Market Risk Contents Preamble ............................................................................................................................................................................................... 5 Minimum capital requirements for market risk ..................................................................................................................... 5 A. The boundary between the trading book and banking book and the scope of application of the minimum capital requirements for market risk ........................................................................................................... 5 1. Scope of application and methods of measuring market risk ...................................................................... 5 2. Definition of the trading book .................................................................................................................................. -
Perspectives on the Equity Risk Premium – Siegel
CFA Institute Perspectives on the Equity Risk Premium Author(s): Jeremy J. Siegel Source: Financial Analysts Journal, Vol. 61, No. 6 (Nov. - Dec., 2005), pp. 61-73 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4480715 Accessed: 04/03/2010 18:01 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=cfa. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. CFA Institute is collaborating with JSTOR to digitize, preserve and extend access to Financial Analysts Journal. http://www.jstor.org FINANCIAL ANALYSTS JOURNAL v R ge Perspectives on the Equity Risk Premium JeremyJ. -
A Theory of Speculative Bubbles, the Fed Model, and Self-Fulfilling
Monetary Exchange in Over-the-Counter Markets: A Theory of Speculative Bubbles, the Fed Model, and Self-fulfilling Liquidity Crises Ricardo Lagos∗ Shengxing Zhangy New York University London School of Economics September 2014 Abstract We develop a model of monetary exchange in over-the-counter markets to study the ef- fects of monetary policy on asset prices and standard measures of financial liquidity, such as bid-ask spreads, trade volume, and the incentives of dealers to supply immediacy, both by participating in the market-making activity and by holding asset inventories on their own account. The theory predicts that asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy as well as the microstructure of the market where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds|an empirical observation long regarded anomalous. The theory also exhibits rational expectations equi- libria with recurring belief driven events that resemble liquidity crises, i.e., times of sharp persistent declines in asset prices, trade volume, and dealer participation in market-making activity, accompanied by large increases in spreads and abnormally long trading delays. Keywords: Money; Liquidity; OTC markets; Asset prices; Fed model; Financial crises JEL classification: D83, E31, E52, G12 ∗Lagos thanks the support from the C.V. Starr Center for Applied Economics at NYU. yZhang thanks the support from the Centre -
Update on the Insurance Industry's Use of Derivatives and Exposure Trends
2/11/2021 Update on the Insurance Industry's Use of Derivatives and Exposure Trends The NAIC’s Capital Markets Bureau monitors developments in the capital markets globally and analyzes their potential impact on the investment portfolios of US insurance companies. A list of archived Capital Markets Bureau Special Reports is available via the index Update on the Insurance Industry's Use of Derivatives and Exposure Trends The NAIC Capital Markets Bureau published several special reports in the past few years concerning derivatives, providing insight into exposure trends, credit default swaps, hedging, changing reporting requirements, and market developments resulting from enactment of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and other global initiatives. This report reviews U.S. insurers' derivatives holdings and exposure trends as of year-end 2015. Key Points: Derivatives activity in the U.S. insurance industry leveled off in 2015. The total notional value of derivative positions was virtually unchanged over year-end 2014, at $2 trillion. An overwhelming 94% of total industry notional value pertains to hedging, virtually unchanged since year-end 2010, when the Capital Markets Bureau began analyzing the data. Out of that 94%, 49% pertained to interest rate hedges, same as a year earlier, while 24% pertained to equity risk. Life insurers accounted for approximately 95% of total notional value, compared to 94% at year-end 2014. Property/casualty (P/C) insurers accounted for 5%, down from 6% a year earlier. Derivatives exposure in the health and fraternal segments was minimal, and title insurers reported no exposure. -
Midyear Outlook 2021: Picking up Speed, We Help You Keep Your Eyes on the Road Ahead
LPL RESEARCH PRESENTSMIDYEAR OUTLOOK 2021 PICKING UP SPEED PICKING UP SPEED INTRODUCTION HE U.S. ECONOMY powered forward faster than nearly anyone had expected in the first half of 2021. As we were writing our Outlook for 2021 in late 2020, our economic views were significantly more optimistic than consensus forecasts—but in retrospect, not nearly optimistic enough. Our theme was getting back on the road again and powering forward. But as the economy accelerates to what may be its best year of growth in decades, power has been converted to speed and we’re trading highways for raceways. Speed can be exhilarating, but it can also be dangerous. Traffic becomes a test of nerves. Turning a sharp corner creates added stress on drivers. Tires wear, and engines can overheat. As we look ahead to the second half of 2021, and even into 2022, we see an economy still on the move before it slowly starts to settle back into historical norms. The speed is thrilling and the overall economic picture remains sound, likely supporting strong profit growth and potential stock market gains. But the pace of reopening also creates new hazards: Supply chains are stressed, some labor shortages have emerged, inflation is heating up—at least temporarily—and asset prices look expensive compared to historical figures. Markets are always forward looking, and in LPL Research’s Midyear Outlook 2021: Picking Up Speed, we help you keep your eyes on the road ahead. We focus on the next 6–12 months, when markets may be looking at which latecomers to the rally have the strength to extend their run, and whether there may be new beneficiaries of the global reopening. -
1Q15 Basel Pillar 3 Report
PILLAR 3 REGULATORY CAPITAL DISCLOSURES For the quarterly period ended March 31, 2015 Table of Contents Disclosure map 1 Introduction 2 Report overview 2 Basel III overview 2 Enterprise-wide risk management 3 Risk governance 3 Regulatory capital 4 Components of capital 4 Risk-weighted assets 5 Capital adequacy 6 Supplementary leverage ratio 7 Credit risk 8 Retail credit risk 10 Wholesale credit risk 12 Counterparty credit risk 13 Securitization 14 Equity risk in the banking book 17 Market risk 18 Material portfolio of covered positions 18 Value-at-risk 19 Regulatory market risk capital models 20 Independent review 23 Economic-value stress testing 23 Operational risk 24 Capital measurement 25 Interest rate risk in the banking book 26 Supplementary leverage ratio 27 Appendix 28 Valuation process 28 Model risk management 28 References 28 DISCLOSURE MAP Pillar 3 Report page 1Q15 Form 10-Q page 2014 Form 10-K page Pillar 3 Requirement Description reference reference reference Capital structure Terms and conditions of capital instruments 4 1, 277, 279 Capital components 4 76 174, 279 Capital adequacy Capital adequacy assessment process 6 55 146, 152 Risk-weighted assets by risk stripe 5 Capital ratios 7 139 285 Credit risk: general 110, 202, 230, 238, 258, disclosures Policies and practices 8 33 287 Credit risk exposures 9 33, 53 110, 138 Retail Distribution of exposure 9 34, 114, 123, 142 113, 243, 254, 288 Impaired loans and ALLL 9 115, 126 244, 260 Wholesale Distribution of exposure 9 40, 106, 124, 142 120, 230, 255, 288 Impaired loans and -
Time Varying and Dynamic Models for Default Risk in Consumer Loads
Edinburgh Research Explorer Time varying and dynamic models for default risk in consumer loads Citation for published version: Crook, J & Bellotti, T 2010, 'Time varying and dynamic models for default risk in consumer loads', Journal of the Royal Statistical Society: Series A, vol. 173, no. 2, pp. 283-305. https://doi.org/10.1111/j.1467- 985X.2009.00617.x Digital Object Identifier (DOI): 10.1111/j.1467-985X.2009.00617.x Link: Link to publication record in Edinburgh Research Explorer Document Version: Peer reviewed version Published In: Journal of the Royal Statistical Society: Series A Publisher Rights Statement: This is an Author's Accepted Manuscript of the following article: Crook, J. & Bellotti, T. 2010, "Time varying and dynamic models for default risk in consumer loans", in Journal of the Royal Statistical Society - Series A: Statistics in Society. 173, 2, p. 283-305, which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/j.1467-985X.2009.00617.x/abstract General rights Copyright for the publications made accessible via the Edinburgh Research Explorer is retained by the author(s) and / or other copyright owners and it is a condition of accessing these publications that users recognise and abide by the legal requirements associated with these rights. Take down policy The University of Edinburgh has made every reasonable effort to ensure that Edinburgh Research Explorer content complies with UK legislation. If you believe that the public display of this file breaches copyright please contact [email protected] providing details, and we will remove access to the work immediately and investigate your claim. -
Study Guide and Learning Objectives
2020 FRR™ Study Guide and Learning Objectives 2020 FRR Study Guide and Learning Objectives garp.org/frr 1 Financial Risk and Regulation Series The broad areas of knowledge covered in the books in the Financial Risk and Regulation Series include the following: BOOK 1: CREDIT RISK BOOK 2: MARKET RISK MANAGEMENT MANAGEMENT CREDIT RISK ASSESSMENT INTRODUCTION TO MARKET RISK MANAGEMENT This chapter introduces the core notions of credit risk This chapter outlines the five main classes of market and the standard quantitative methods for assessing risk and introduces risk expressed in implied volatility it. The difference between expected credit loss and and implied correlation. unexpected credit loss is outlined. FOREIGN EXCHANGE MARKETS, INSTRUMENTS, THE RISKS OF CREDIT PRODUCTS AND RISKS Credit risks in multiple bank business lines are This chapter reviews the standard instruments in the outlined in this chapter, including retail, SME, large global foreign exchange (FX) markets and discusses corporate, and sovereign exposures. Credit risk how foreign exchange risk arises. Exotic options are models, including scorecard and distance-to-default, introduced, and their more sophisticated risks are covered and credit valuation adjustment (CVA) are displayed. is introduced. INTEREST RATE MARKETS, INSTRUMENTS, CREDIT RISK PORTFOLIO MANAGEMENT AND RISKS Whereas the first two chapters cover single event This chapter covers both short- and long-term credit risk, this chapter focuses on the portfolio view interest rate risk, which is expressed through changes of credit risk. Correlation in credit risk is introduced, in the yield curve. Duration and PV01 are described as are credit default swaps (CDS), both in single- as basic tools for quantifying interest rate risk. -
4Q18 Basel Pillar 3 Report
PILLAR 3 REGULATORY CAPITAL DISCLOSURES For the quarterly period ended December 31, 2018 Table of Contents Disclosure map 1 Introduction 2 Report overview 2 Basel III overview 2 Enterprise-wide risk management 3 Governance and oversight 4 Regulatory capital 5 Components of capital 5 Risk-weighted assets 6 Capital adequacy 8 Supplementary leverage ratio 9 Impact of a Bank Holding Company Resolution Event 10 Credit risk 11 Retail credit risk 13 Wholesale credit risk 16 Counterparty credit risk 18 Securitization 20 Equity risk in the banking book 23 Market risk 25 Material portfolio of covered positions 25 Value-at-risk 25 Regulatory market risk capital models 26 Independent review 30 Stress testing 31 Operational risk 32 Capital measurement 32 Interest rate risk in the banking book 33 Supplementary leverage ratio 34 Appendix 35 Valuation process 35 Estimations and model risk management 36 References 37 DISCLOSURE MAP Pillar 3 Report page 2018 Form 10-K page Pillar 3 Requirement Description reference reference Capital structure Terms and conditions of capital instruments 5 1, 257, 259 Capital components 5 152, 259, 260 Capital adequacy Capital adequacy assessment process 8 85, 91 Risk-weighted assets by risk stripe 7 Regulatory capital metrics 8 269 Credit risk: general Policies and practices 11 102, 182, 211, 219, 239, disclosures 271 Credit risk exposures 12 102, 133 Retail Distribution of exposure 12 106, 224, 234, 272 Impaired loans and ALLL 12 225, 242 Wholesale Distribution of exposure 12 112, 211, 236, 272 Impaired loans and ALLL 12