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BASEL II

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BASEL II

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BASEL II

  1. 1. FRE 6791 Prof: Roy Freedman BASEL II Mohammed Alshetwey's Project Poly ID 0349913
  2. 2. <ul><li>Basel II is the second of the Basel Accords. </li></ul><ul><li>The purpose of Basel II is to create a standard about how much capital need to put aside against operational risks. </li></ul><ul><li>Basically , these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  3. 3. BASEL II aims <ul><li>Ensuring that capital allocation is more risk sensitive. </li></ul><ul><li>Separating operational risk from credit risk, and quantifying both. </li></ul><ul><li>Attempting to economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  4. 4. Basel II concepts <ul><li>(1) Minimum capital requirements. </li></ul><ul><li>(2) Supervisory review. </li></ul><ul><li>(3) Market discipline. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  5. 5. Minimum capital requirements <ul><li>The first concept deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: </li></ul><ul><li>credit risk. </li></ul><ul><li>Operational risk. </li></ul><ul><li>market risk. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  6. 6. Supervisory review <ul><li>The second concept deals with the regulatory response to the first one. </li></ul><ul><li>Giving regulators much-improved 'tools' over those available to them. </li></ul><ul><li>It also provides a framework for dealing with all the other risks a bank may face. </li></ul><ul><li>Such as liquidity risk and legal risk </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  7. 7. Market discipline <ul><li>The third concept greatly increases the disclosures that the bank must make. </li></ul><ul><li>This is designed to allow the market to have a better picture of the overall risk position of the bank. </li></ul><ul><li>To allow the counterparties of the bank to price and deal appropriately. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  8. 8. How to calculate the risk? <ul><li>The new Accord maintains the current definition of total capital and the minimum 8% requirement. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  9. 9. Standardized Approach <ul><li>Organization is treaded as a single entity </li></ul><ul><li>Single Factor Calculation ミ Gross Income </li></ul><ul><li>Risk is represented Alpha ( α ) </li></ul><ul><li>Costly. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  10. 10. Advanced Measurement Approach <ul><li>Organization divided into Business Units. </li></ul><ul><li>The Indicator varies between Business Units. </li></ul><ul><li>Risk is represented in each Business Unit by a Beta . </li></ul><ul><li>Less Costly </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  11. 11. Example (1) <ul><li>Standardized Approach: </li></ul><ul><li> = 30 “Basel Standard” </li></ul><ul><li>Gross Income = 100 million $ </li></ul><ul><li>Capital Requirement = 30 million $ </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  12. 12. Example (2) <ul><li>Advanced Measurement approach: </li></ul><ul><li> = 8 % “Minimum” </li></ul><ul><li>Gross Income = 100 million $ </li></ul><ul><li>Capital requirement = 8 million $ </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  13. 13. Benefits of using AMA <ul><li>Assume 10 % Return on Investment </li></ul><ul><li>Capital Req. saving = 8 Million $ </li></ul><ul><li>Opportunity Benefit = 0.8 million $ </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  14. 14. Summarizing <ul><li>Basel II is good for diversified the risk approaches. </li></ul><ul><li>Basel II gives a specific ratio to each risk. </li></ul><ul><li>They have now proposed changes in America's version of Basel 2 that will delay its implementation until at least January 2009. </li></ul><ul><li>Note: Best practices doesn’t work always. </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  15. 15. Thank you <ul><li> Happy Holiday </li></ul>Mohammed Alshetwey's Project Poly ID 0349913
  16. 16. Refrences <ul><li>www.bis.org </li></ul><ul><li>http://en.wikipedia.org/wiki/Basel_2 </li></ul><ul><li>Mr. David Coriat. A project on Basel II </li></ul><ul><li>http://inductive.net/fe/675/samples/ </li></ul>Mohammed Alshetwey's Project Poly ID 0349913

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