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1、ChapterFifteenTheManagementofCapitalKeyTopicsTheManyTasksofCapitalCapitalandRiskExposuresTypesofCapitalInUseCapitalastheCenterpieceofRegulationBaselIandBaselIICapitalRegulationintheWakeoftheGreatRecession/BaselIIIPlanningtoMeetCapitalNeedsIntroductionWhatiscapital?Fundscontributedbytheownersofafinan
2、cialinstitutionRaisingandretainingsufficientcapitaltoprotecttheinterestsofcustomers,employees,owners,andthegeneralpublicistoughWhyiscapitalsoimportantinfinancial-servicesmanagement?ItprovidesacushionofprotectionagainstriskandpromotespublicconfidenceCapitalhasbecomethecenterpieceofsupervisionandregul
3、ationtodayTheManyTasksCapitalPerforms1.Providesacushionagainsttheriskoffailure2.Providesfundstohelpinstitutionsgetstarted3.Promotespublicconfidence4.Providesfundsforgrowth5.Regulatorofgrowth6.RegulatorytooltolimitriskexposureCapitalandRisksKeyRisksinBankingandFinancialInstitutionsManagementCreditRis
4、kLiquidityRiskInterestRateRiskOperationalRiskExchangeRiskCrimeRiskCapitalandRisks(continued)DefensesagainstRisksQualityManagementDiversificationGeographicPortfolioDepositInsuranceOwnersCapitalTypesofCapitalinUse1.Commonstock2.Preferredstock3.Surplus4.Undividedprofits5.Equityreserves6.Subordinateddeb
5、entures7.Minorityinterestinconsolidatedsubsidiaries8.EquitycommitmentnotesTABLE151CapitalAccountsofFDIC-InsuredU.S.CommercialBanks,December31,2010OneoftheGreatIssuesintheHistoryofBanking:HowMuchCapitalIsReallyNeeded?RegulatoryApproachtoEvaluatingCapitalNeedsReasonsforCapitalRegulation1.Tolimitriskof
6、failures2.Topreservepublicconfidence3.TolimitlossestothegovernmentandotherinstitutionsarisingfromdepositinsuranceclaimsOneoftheGreatIssuesintheHistoryofBanking:HowMuchCapitalIsReallyNeeded?(continued)RegulatoryApproachtoEvaluatingCapitalNeedsResearchEvidenceResearchhasbeenconductedontheissueofwhethe
7、rtheprivatemarketplaceorgovernmentregulatoryagenciesexertabiggereffectonbankrisktakingMoststudiesfindthattheprivatemarketplaceisprobablymoreimportantthangovernmentregulationinthelongrunRecentlygovernmentregulationappearstohavebecomenearlyasimportantastheprivatemarketplaceEspeciallyinthewakeofthegrea
8、tcreditcrisisof2007-2009OneoftheGreatIssuesintheHistoryofBanking:HowMuchCapitalIsReallyNeeded?(continued)RegulatoryApproachtoEvaluatingCapitalNeedsResearchEvidenceWearenotatallsuremarketdiscipliningworksaswellforsmallandmedium-sizeinsureddepositoryinstitutionsSomeofthemostpertinentinformationneededt
9、oassessabanksriskexposureisknownonlytogovernmentregulatorsResearchhasfoundthatincreasedcapitaldoesnotmateriallylowerabanksfailureriskTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNationsTheBaselAgreementAninternationalagreementonnewcapitalstandardsDesignedto
10、keeptheircapitalpositionsstrongReduceinequalitiesincapitalrequirementsamongdifferentcountriesPromotefaircompetitionCatchupwithrecentchangesinfinancialservicesandfinancialinnovationInparticular,theexpansionofoff-balance-sheetcommitmentsFormallyapprovedinJuly1988Includedcountriessuchas:TheUnitedStates
11、,Belgium,Canada,France,Germany,Italy,Japan,theNetherlands,Spain,Sweden,Switzerland,theUnitedKingdom,andLuxembourgTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)BaselITheoriginalBaselcapitalstandardsareknowntodayasBaselIVarioussourcesofcapita
12、lweredividedintotwotiers:Tier1(core)capitalCommonstockandsurplus,undividedprofits(retainedearnings),qualifyingnoncumulativeperpetualpreferredstock,minorityinterestintheequityaccountsofconsolidatedsubsidiaries,andselectedidentifiableintangibleassetslessgoodwillandotherintangibleassetsTier2(supplement
13、al)capitalAllowance(reserves)forloanandleaselosses,subordinateddebtcapitalinstruments,mandatoryconvertibledebt,intermediate-termpreferredstock,cumulativeperpetualpreferredstockwithunpaiddividends,andequitynotesandotherlong-termcapitalinstrumentsthatcombinebothdebtandequityfeaturesTheBaselAgreementon
14、InternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)BaselIInorderforabanktoqualifyasadequatelycapitalized,itmusthave:1.Aratioofcorecapital(Tier1)tototalrisk-weightedassetsofatleast4percent2.Aratiooftotalcapital(thesumofTier1andTier2capital)tototalrisk-weightedasset
15、sofatleast8percent,withtheamountofTier2capitallimitedto100percentofTier1capitalTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)CalculatingRisk-WeightedAssetsEachassetitemonabanksbalancesheetandeachoff-balance-sheetcommitmentithasmadearemultip
16、liedbyarisk-weightingfactorDesignedtoreflectitscreditriskexposureThemostcloselywatchedoff-balance-sheetitemsarestandbylettersofcreditandlong-term,legallybindingcreditcommitmentsTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)CalculatingRisk-W
17、eightedAssetsTocomputethisbanksrisk-weightedassets:1.Computethecredit-equivalentamountofeachoff-balance-sheet(OBS)itemTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)CalculatingRisk-WeightedAssetsTocomputethisbanksrisk-weightedassets:2.Multip
18、lyeachbalancesheetitemandthecredit-equivalentamountofeachOBSitembyitsriskweightTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)CalculatingtheCapital-to-Risk-WeightedAssetsRatioUnderBaselI,onceweknowabankstotalrisk-weightedassetsanditsTier1and
19、Tier2capitalamounts,wecandetermineitsrequiredcapitaladequacyratiosTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)CapitalRequirementsAttachedtoDerivativesTheBaselIcapitalstandardswereadjustedtotakeaccountoftheriskexposurebanksmayfacefromderiv
20、ativesFutures,options,swaps,interestratecapandfloorcontracts,andotherinstrumentsSometimesexposeabanktocounterpartyriskThedangerthatacustomerwillfailtopayortoperform,forcingthebanktofindareplacementcontractwithanotherpartythatmaybelesssatisfactoryTheBaselAgreementonInternationalCapitalStandards:ACont
21、inuingHistoricContractAmongLeadingNations(continued)CapitalRequirementsAttachedtoDerivatives(continued)Baselrequiredabankertodivideeachcontractsriskexposureintotwocategories1.Potentialmarketriskexposure2.CurrentmarketriskexposureOncethereplacementcostofacontractisdetermined:Theestimatedpotentialmark
22、etriskexposureamountisaddedtotheestimatedcurrentmarketriskexposuretoderivethetotalcredit-equivalentamountofeachderivativecontractThistotalismultipliedbythecorrectriskweight,tofindtheequivalentamountofrisk-weightedassetsrepresentedbyeachcontractTheBaselAgreementonInternationalCapitalStandards:AContin
23、uingHistoricContractAmongLeadingNations(continued)CapitalRequirementsAttachedtoDerivatives(continued)TheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)CapitalRequirementsAttachedtoDerivatives(continued)TheBaselAgreementonInternationalCapitalSta
24、ndards:AContinuingHistoricContractAmongLeadingNations(continued)BankCapitalStandardsandMarketRiskBaselIfailedtoaccountformarketriskThelossesabankmaysufferduetoadversechangesininterestrates,securityprices,andcurrencyandcommoditypricesTheriskweightsonbankassetsweredesignedprimarilytotakeaccountofcredi
25、trisk(notmarketrisk)Inanefforttodealwiththeseandotherformsofmarketrisk,in1996theBaselCommitteeapprovedamodificationtotherulesPermittedthelargestbankstoconductriskmeasurementandestimatetheamountofcapitalnecessarytocovermarketriskLedtoathirdcapitalratio(Tier3)TheBaselAgreementonInternationalCapitalSta
26、ndards:AContinuingHistoricContractAmongLeadingNations(continued)ValueatRisk(VaR)ModelsRespondingtoMarketRiskAstatisticalframeworkformeasuringabankportfoliosexposuretochangesinmarketpricesormarketratesoveragiventimeperiod,subjecttoagivenprobabilityVaRExampleAbankestimatesitsportfoliosdailyaveragevalu
27、eatriskis$100billionovera10-dayintervalwitha99percentlevelofconfidenceIfthisVaRestimateof$100billioniscorrect,lossesinportfoliovaluegreaterthan$100billionshouldoccurlessthan1percentofthetimeTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)Limi
28、tationsandChallengesofVaRandInternalModelingVaRestimatesandinternalmodelingarenotperfectInaccurateVaRestimatescanexposeabanktoexcessiverisksothatitscapitalpositionmayturnoutnottobelargeenoughtocoveractuallossesthebankfacesTheportfoliosofthelargestbanksaresocomplexwiththousandsofriskfactorsitmaybeimp
29、ossibletoconsistentlyforecastVaRsaccuratelyPromote“backtesting”Evenifanindividualbankisagoodforecaster,theremaystillbetroubleduetosystemicriskTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)BaselIIBankersfoundwaysaroundmanyofBaselIsrestrictio
30、nsCapitalarbitrageInsteadofmakingbankslessrisky,partsofBaselIseemedtoencouragebankstobecomemoreriskyBaselIrepresenteda“onesizefitsall”approachtocapitalregulationItfailedtorecognizethatnotwobanksarealikeintermsoftheirriskprofilesBaselIIsetupasysteminwhichcapitalrequirementswouldbemoresensitivetoriska
31、ndprotectagainstmoretypesofriskthanBaselIBaselIIwouldbegraduallyphasedinforthelargestinternationalbanksTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)PillarsofBaselII1.Minimumcapitalrequirementsforeachbankbasedonitsownestimatedriskexposurefr
32、omcredit,market,andoperationalrisks2.Supervisoryreviewofeachbanksrisk-assessmentproceduresandtheadequacyofitscapitaltoensuretheyare“reasonable”3.Greaterpublicdisclosureofeachbankstruefinancialconditionsothatmarketdisciplinecouldbecomeamorepowerfulforcecompellingexcessivelyriskybankstolowertheirriske
33、xposureTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)BaselIIandCreditRiskModelsCreditriskmodelsComputeralgorithmsthatattempttomeasurealendersexposuretodefaultbyitsborrowingcustomersortocreditdowngradingsMostcreditriskmodelsdevelopestimatesb
34、asedupon:BorrowercreditratingsTheprobabilitythosecreditratingswillchangeTheprobableamountofrecoveryshouldsomeloansdefaultThepossibilityofchanginginterest-ratespreadsbetweenriskierandlessriskyloansTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continue
35、d)BaselIIandCreditRiskModelsUnderBaselI,minimumcapitalrequirementsremainedthesameformosttypesofloansregardlessofcreditratingUnderBaselII,minimumcapitalrequirementsweredesignedtovarysignificantlywithcreditqualityTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingN
36、ations(continued)ADual(Large-Bank,Small-Bank)SetofRulesBaselIIwasdesignedtooperateunderonesetofcapitalrulesforthehandfuloflargestmultinationalbanksandanothersetformorenumeroussmallerbankingfirmsRegulatorswereconcernedthatsmallerbankscouldbeoverwhelmedby:Theheavyburdensofgatheringrisk-exposureinforma
37、tionPerformingcomplicatedriskcalculationsBaselIIanticipatedthatsmallerinstitutionswouldbeabletocontinuetousesimplerapproachesindeterminingtheircapitalrequirementsandriskexposures,parallelingBaselIrulesTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(con
38、tinued)ProblemsAccompanyingtheImplementationofBaselIIBaselIIwasnotperfectSomeformsofriskhadnogenerallyacceptedmeasurementscaleOperationalRiskHowdoweaddupthedifferentformsofriskexposureinordertogetanaccuratepictureofabankstotalriskexposure?Whatshouldwedoaboutthebusinesscycle?Mostbanksaremorelikelytof
39、aceriskexposureinthemiddleofaneconomicrecessionthantheywillinaperiodofeconomicexpansionForexample,theGlobalcreditcrisisof2007-2009SomehaveexpressedconcernaboutimprovingregulatorcompetenceTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)BaselII
40、I:AnotherMajorRegulatoryStepUnderway,BorninGlobalCrisisBaselIIwasneverfullyimplementedHadtomovetowardBaselIIIinordertopreventfuturecrisesKeyissueinBaselIIIDeterminingthevolumeandmixofcapitaltheworldsleadingbanksshouldmaintainiftheirtroubledassetsgeneratemassivelossesCapitalrequirementslaiddowninBase
41、lIandIIapparentlywereinadequateinthefaceofthelatestcreditcrashBankersfoundwaystoholdbothlesscapitalintotalandaweakermixofkindsofcapitalTheBaselAgreementonInternationalCapitalStandards:AContinuingHistoricContractAmongLeadingNations(continued)BaselIII:AnotherMajorRegulatoryStepUnderway,BorninGlobalCri
42、sisProponentsofBaselIIIcalledforgreatertotalcapitalization,strongerdefinitionofwhatbelongsinbankscapitalaccountsVolckerRulewasproposedintheU.S.ImplementationofBaselIIIcouldtakemanyyearsImplementationwouldbephasedinslowly,beginningin2012andpossiblybecompletedcloseto2019BaselIIIcoversthecapital,liquid
43、ity,anddebtpositionsofindividualinternationalbanksandalsobroaderissuesassociatedwithglobalbusinesscyclesandsystemicrisksChangingCapitalStandardsInsidetheUnitedStatesSeveralnewcapitalrulescreatedrecentlybyU.S.regulatoryagenciesweremandatedbytheFDICImprovementActof1991RequiresfederalregulatorstotakePr
44、omptCorrectiveAction(PCA)whenaninsureddepositoryinstitutionscapitalfallsbelowacceptablelevelsU.S.bankregulatorscreatedcapital-adequacycategoriesforimplementingPCA:1.Wellcapitalized2.Adequatelycapitalized3.Undercapitalized4.Significantlyundercapitalized5.CriticallyundercapitalizedPlanningtoMeetCapita
45、lNeedsRaisingCapitalInternallyDividendPolicyTheboardofdirectorsandmanagementmustagreeontheappropriateretentionratioanddividendpayoutratioKeyfactor-HowfastthefinancialfirmcanallowitsassetstogrowsothatitscurrentratioofcapitaltoassetsisprotectedfromerosionPlanningtoMeetCapitalNeeds(continued)RaisingCap
46、italInternallyDividendPolicyPlanningtoMeetCapitalNeeds(continued)RaisingCapitalExternallyIfafinancialfirmdoesneedtoraisecapitalfromoutsidesources,ithasseveraloptions:1.Sellingcommonstock2.Sellingpreferredstock3.Issuingdebtcapital4.Sellingassets5.Leasingfacilities6.SwappingstockfordebtsecuritiesThech
47、oiceofwhichmethodtouseisbasedontheireffectsonafinancialfirmsearningspershareTABLE152MethodsofRaisingExternalCapitalforaFinancialFirmQuickQuizWhatcrucialrolesdoescapitalplayinthemanagementandviabilityofafinancialfirm?WhatarethemostimportantandleastimportantformsofcapitalheldbyU.S.-insuredbanks?Whatis
48、therationaleforhavingthegovernmentsetcapitalstandardsforfinancialinstitutionsasopposedtolettingtheprivatemarketplacesetthosestandards?HowistheBaselAgreementlikelytoaffectabankschoicesamongassetsitwouldliketoacquire?WhatarethedifferencesamongBaselI,II,andIII?Whataretheprincipalsourcesofexternalcapitalforafinancialinstitution?
