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1、WWW.HENRYLIANG.COM HENRY LIANGS FRM GUIDE II HENRY LIANG, CQF Algo trader / quant Golden Future Education: senior CFA/FRM lecturer CATTI Certified Interpreter Level II Member of the Translators Association of China Practitioner of Kyokushin Karate FRM: LESS IS MORE i Last update: 6 May, 2017 Photogr
2、apher: Josef Koudelka Invasion Prague BASEL ACCORD 5 6 A. Basel I Reasons for bank regulation Ensure that a bank keeps enough capital for the risks it takes. Make the probability of default for any given bank very small. Create a stable economic environment where private individuals and businesses h
3、ave confidence in the banking system. Dual safety: deposit insurance provided by governments + bank regulation concerned with capital requirements. Systemic risk A failure by a large bank will lead to failures by other large banks and a collapse of the financial system. When a large bank gets into f
4、inancial difficulties too big to fail (the government will bail them out). Bank regulation pre-1988 Definitions of capital and the ratios varied from country to country. A Bank operating in a country where capital regulations were slack had a competitive edge. The types of transactions entered into
5、by banks were becoming more complicated: such as over-the-counter derivatives. The value of total assets was no longer a good indicator of the total risks being HISTORY OF THE BASEL ACCORD SECTION 1 7 BASEL I 1996 AMENDMEN T BASEL IIBASEL 2.5BASEL III Begin in198819962007 2011 implementatio n 2010 C
6、overingCredit risk: SA Market risk: SA, IMA Credit risk: SA, IRB Stressed VaR, IRC, CRM CCB, CB, Leverage ratio Cooke ratioAdd Tier 3 Op risk: BIA, SA, AMA Liquidity risk Three pillars Counterparty credit risk taken: for example, the PFE (potential future exposure) on derivatives was not reflected i
7、n the banks reported assets. B. Basel II Basel IIs application The Basel II capital requirements applied to “internationally active” banks. In the US: Basel II would not apply to small regional banks. In Europe: all banks, large or small, were regulated under Basel II. Furthermore, the European Unio
8、n required the Basel II rules to be applied to securities companies. Three Pillars (since Basel II) Pillar 1. Minimum Capital Requirements Total Capital = 0.08 (credit risk RWA + market risk RWA + operational risk RWA) Pillar 2. Supervisory Review It covers both quantitative and qualitative aspects
9、of the ways risk is managed within a bank. Banks are expected to keep more than the minimum regulatory capital. Early intervention: to prevent capital from falling below the minimum levels. Supervisors encourage banks to develop better risk management techniques. Banks should evaluate risks that are
10、 not covered by Pillar 1. Pillar 3. Market Discipline Banks should disclose more information. C. Basel II.5 Changes to Basel II.5 Some commentators have blamed Basel II for the crisis: when calculating regulatory capital, banks had the freedom to use their own estimates of model inputs such as PD, L
11、GD, and EAD. Basel 2.5 added: - The calculation of a stressed VaR; - A new incremental risk charge; - A comprehensive risk measure for instruments dependent on credit correlation. D. Basel III Newly-added parts 1.Capital definition and requirements 2.Capital Conservation Buffer 3.Countercyclical Buf
12、fer 4.Leverage ratio 5.Liquidity risk 8 6.Counterparty credit risk Leverage Ratio Leverage ratio = total Tier 1 capital / exposure =3% The exposure measure is the sum of - On-balance-sheet exposures; - Derivatives exposures; - Securities financing transaction exposures; - Off-balance-sheet items. Wh
13、y introduce the leverage ratio? Regulators require banks to satisfy: The ratios of capital to risk-weighted assets; The ratio of capital to non-risk-weighted exposure. Proponents and opponents of the leverage ratio Proponents: the rules for determining risk-weighted assets have become too complicate
14、d. Opponents: the leverage ratio encourages banks to hold risky assets banks become more likely to fail. Liquidity Risk Reasons to consider liquidity risk Liquidity risks arise because there is a tendency for banks to finance long-term needs with short-term funding, such as commercial paper. As soon
15、 as the bank experiences financial difficulties, it becomes impossible for the bank to roll over its commercial paper. Liquidity Coverage Ratio (LCR) LCR = High-Quality Liquid Assets / Net Cash Outflows in a 30-Day Period 100% The LCR focuses on a banks ability to survive a 30-day period of liquidit
16、y disruptions. HQLA: - High credit; - Certain valuation; - Low correlation with risky assets; - Listed on recognised exchanges; - Not carrying claims against them. Level 1 assets (highly liquid): - Cash; - Central bank reserves; - Marketable securities. Net cash outflows = outflows over the next 30 days min(inflow, 75% of outflows) Net Stable Funding Ratio (NSFR) NSFR = Amount of Stable Funding / Required Amount of
