This document discusses international banking regulation and the Basel Accords. It outlines the objectives of understanding why banking is more regulated than other industries and evaluating the Basel I and II accords. The key risks banks face are financial risks like credit and market risk, and non-financial risks such as operational and business risks. Regulations aim to minimize bank failures and their impact on the economy. While regulations are justified by market failures, some argue they limit risk-taking needed for profits. The Basel Accords established capital standards for banks to improve financial stability.
This document outlines the key points of Chapter 7 which discusses international banking regulation and the Basel Accords. It begins by explaining why banks are assigned special importance compared to other businesses due to factors like their role in the payment system and the risk of bank failures disrupting the economy. It then discusses the types of risk banks face and the justification for banking regulation. The document evaluates the Basel I and II accords which established international capital standards and risk-weighting of bank assets. It provides details on the development and objectives of the Basel Committee and the capital adequacy framework under the Basel accords.
This document contains slides from a chapter on international short-term financing and investment. It discusses various topics including internal and external sources of financing for multinational firms, the costs and benefits of foreign currency financing versus domestic currency financing, short-term investment options in different currencies, and managing foreign exchange risk through a centralized cash management system versus a decentralized system. The key advantages of a centralized system include netting of positions across subsidiaries, currency diversification reducing overall risk, and pooling of cash balances.
This chapter describes the foreign exchange market. It discusses the objectives of the chapter which are to describe the FX market, identify participants and currencies, describe the Australian FX market and mechanics of FX trading, introduce some exchange rate concepts and position keeping, and introduce some FX terminology. It then defines the FX market, describes its characteristics and size, identifies the major participants including customers, commercial banks, other institutions and central banks. It also discusses the Australian FX market, components of an FX transaction, and technologies used in FX trading like screens and online trading. Finally, it introduces concepts like bid/offer rates, cross rates, and nostro/vostro accounts for FX position keeping.
Wealth management the next frontier of disruption | afr.comMike Ghenta
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Strategic planning is the art of creating specific business strategies, implementing them, and evaluating the results of executing the plan, in regard to a company’s overall long-term goals or desires. It is a concept that focuses on integrating various departments (such as accounting and finance, marketing, and human resources) within a company to accomplish its strategic goals. The term strategic planning is essentially synonymous with strategic management. The concept of strategic planning originally became popular in the 1950s and 1960s, and enjoyed favor in the corporate world up until the 1980s, when it somewhat fell out of favor. However, enthusiasm for strategic business planning was revived in the 1990s and strategic planning remains relevant in modern business. The strategic planning process requires considerable thought and planning on the part of a company’s upper-level management. Before settling on a plan of action and then determining how to strategically implement it, executives may consider many possible options. In the end, a company’s management will, hopefully, settle on a strategy that is most likely to produce positive results (usually defined as improving the company’s bottom line) and that can be executed in a cost-efficient manner with a high likelihood of success, while avoiding undue financial risk.
The document analyzes the securities industry and Nomura Securities. It discusses factors affecting the industry outlook such as unstable European markets and decreased M&A activity. It also examines Nomura's asset and liability structure, income sources such as commissions and trading gains, and risk management structure comprising nine departments. The challenges of integrating Nomura and Lehman Brothers' differing cultures are addressed, as well as opportunities from Nomura's acquisition of Lehman assets.
The Dahbol Power Project was a failed power project in India financed through project finance. The special purpose vehicle (SPV) structure isolated project-related risks and cash flows. Key relationships included power purchase agreements with state utilities and fuel supply contracts. Major risks included unreliable fuel supply and lower than expected power demand. The project was majority debt financed but struggled due to contractual issues affecting cash flows. This case demonstrates some of the risks in relying on contractual agreements in project finance structures.
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Regulatory burden has significantly impacted the insurance and wealth management sector in Australia. Banking regulations like Basel III have indirectly affected bank-owned wealth and insurance divisions. Stringent domestic regulation from bodies like ASIC and APRA, while protecting customers, have adversely impacted profits in the short term and led some banks to sell insurance operations. However, most senior executives believe regulations will benefit the sectors in the long run by improving practices and stability, despite short term costs.
This document outlines the key points of Chapter 7 which discusses international banking regulation and the Basel Accords. It begins by explaining why banks are assigned special importance compared to other businesses due to factors like their role in the payment system and the risk of bank failures disrupting the economy. It then discusses the types of risk banks face and the justification for banking regulation. The document evaluates the Basel I and II accords which established international capital standards and risk-weighting of bank assets. It provides details on the development and objectives of the Basel Committee and the capital adequacy framework under the Basel accords.
This document contains slides from a chapter on international short-term financing and investment. It discusses various topics including internal and external sources of financing for multinational firms, the costs and benefits of foreign currency financing versus domestic currency financing, short-term investment options in different currencies, and managing foreign exchange risk through a centralized cash management system versus a decentralized system. The key advantages of a centralized system include netting of positions across subsidiaries, currency diversification reducing overall risk, and pooling of cash balances.
This chapter describes the foreign exchange market. It discusses the objectives of the chapter which are to describe the FX market, identify participants and currencies, describe the Australian FX market and mechanics of FX trading, introduce some exchange rate concepts and position keeping, and introduce some FX terminology. It then defines the FX market, describes its characteristics and size, identifies the major participants including customers, commercial banks, other institutions and central banks. It also discusses the Australian FX market, components of an FX transaction, and technologies used in FX trading like screens and online trading. Finally, it introduces concepts like bid/offer rates, cross rates, and nostro/vostro accounts for FX position keeping.
Wealth management the next frontier of disruption | afr.comMike Ghenta
The document discusses how technological developments like the ASX's mFund Settlement Service and robo-advice are poised to disrupt the wealth management industry. The mFund Service allows individuals to invest in managed funds directly on the ASX at lower costs than through financial platforms. Robo-advice further automates and lowers the costs of advice. An entrepreneur argues this could undermine the platforms of large banks and wealth managers by unbundling services and increasing transparency. Experts say these technologies may improve outcomes for retail investors and competition in the industry by reducing costs and conflicts of interest.
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Strategic planning is the art of creating specific business strategies, implementing them, and evaluating the results of executing the plan, in regard to a company’s overall long-term goals or desires. It is a concept that focuses on integrating various departments (such as accounting and finance, marketing, and human resources) within a company to accomplish its strategic goals. The term strategic planning is essentially synonymous with strategic management. The concept of strategic planning originally became popular in the 1950s and 1960s, and enjoyed favor in the corporate world up until the 1980s, when it somewhat fell out of favor. However, enthusiasm for strategic business planning was revived in the 1990s and strategic planning remains relevant in modern business. The strategic planning process requires considerable thought and planning on the part of a company’s upper-level management. Before settling on a plan of action and then determining how to strategically implement it, executives may consider many possible options. In the end, a company’s management will, hopefully, settle on a strategy that is most likely to produce positive results (usually defined as improving the company’s bottom line) and that can be executed in a cost-efficient manner with a high likelihood of success, while avoiding undue financial risk.
The document analyzes the securities industry and Nomura Securities. It discusses factors affecting the industry outlook such as unstable European markets and decreased M&A activity. It also examines Nomura's asset and liability structure, income sources such as commissions and trading gains, and risk management structure comprising nine departments. The challenges of integrating Nomura and Lehman Brothers' differing cultures are addressed, as well as opportunities from Nomura's acquisition of Lehman assets.
The Dahbol Power Project was a failed power project in India financed through project finance. The special purpose vehicle (SPV) structure isolated project-related risks and cash flows. Key relationships included power purchase agreements with state utilities and fuel supply contracts. Major risks included unreliable fuel supply and lower than expected power demand. The project was majority debt financed but struggled due to contractual issues affecting cash flows. This case demonstrates some of the risks in relying on contractual agreements in project finance structures.
Regulatory burden and impact on the insurance and wealth management sectors ...Totalwealth Plan
Regulatory burden has significantly impacted the insurance and wealth management sector in Australia. Banking regulations like Basel III have indirectly affected bank-owned wealth and insurance divisions. Stringent domestic regulation from bodies like ASIC and APRA, while protecting customers, have adversely impacted profits in the short term and led some banks to sell insurance operations. However, most senior executives believe regulations will benefit the sectors in the long run by improving practices and stability, despite short term costs.
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This document discusses corporate governance in financial services following the global financial crisis. It begins by outlining the importance of corporate governance and defines it as the procedures and processes by which an organization is directed and controlled. It then discusses key principles of corporate governance for banks according to the Basel Committee on Banking Supervision, including setting objectives, risk management, and protecting depositors. The document notes that sound corporate governance in banks can promote economic development by increasing access to finance and improving operational performance. However, poorly governed banks can damage the economy. While boards and senior management have primary responsibility for governance, other stakeholders like regulators, shareholders, and governments also play important roles. The document reviews key events in banking history over the 20th century and
This document summarizes the thesis of Mukakalisa Faith titled "Legal Protection of Micro-Finance Clients in Case of Bankruptcy." The 10-point agenda outlines the thesis structure, including an introduction on microfinance in Rwanda, research objectives to understand legal protections for clients, methodology, and key findings. Major findings noted a lack of binding laws and regulatory gaps contributed to microfinance crises in 2005-2006 when several institutions closed, harming depositors. Recommendations included establishing binding microfinance laws, guarantee funds, deposit insurance, and strengthening regulatory oversight.
The document is a presentation about IBM's global microfinance program. It discusses:
1) The opportunity and need for microfinance services due to the large unbanked population globally. Traditional banks face challenges serving this segment.
2) IBM's mandate to develop new business models to allow financial institutions to profitably provide basic banking to underserved populations.
3) The IBM Microfinance Processing Hub, a shared technology platform designed specifically for microfinance institutions to help reduce costs and enable rapid scaling.
Peer-to-peer lending and equity crowdfunding have grown rapidly since the crisis and have attracted the attention of governments who wish to facilitate alternative forms of capital allocation. This report investigates the nature of Financial Return crowdfunding, including outlining the main benefits and risks of the industry and the global regulatory environment the industry currently operates in.
1) The document discusses the causes and effects of the 2008 global financial crisis, comparing it to the 1929 crash. It analyzes factors like loose regulation, risky lending practices, and accounting standards that contributed to hidden economic bubbles bursting.
2) Going forward, the document recommends measures like improving supervision, reforming compensation schemes, and coordinating international regulatory alignment to prevent future crises and promote recovery.
3) While short term economic pressure is expected, stimulus packages and a focus on innovation could help economies recover once clean up of bank balance sheets is complete. Risk management practices will also likely be overhauled.
Monday April 9 2012 - Top 10 risk and compliance management related news stor...Compliance LLC
The document summarizes the results of the Basel III monitoring exercise as of June 30, 2011 conducted by the Basel Committee on Banking Supervision and the European Banking Authority. A total of 158 European banks submitted data, consisting of 48 large internationally active banks (Group 1) and 110 other banks (Group 2). The results showed a shortfall of liquid assets of €1.15 trillion, representing 3.7% of total assets of €31 trillion, if banks made no changes to their liquidity risk profile. The monitoring assessed the impact of the new Basel III capital and liquidity requirements and compared results to current national implementations of Basel II.
1.2. Definition of Terms
In this guideline, unless the context requires otherwise;
A. “Account planning” means an activity that involves conducting in-depth reviews of current activity and future sales prospects for each major client and/or prospects of the bank. It is the process of building strategic plans to improve value-driven relationships with our key clients that can help to gain a more in-depth understanding in long-term development and retention, thereby maximizing the banks revenue potential;
B. “Bank” means the Commercial Bank of Ethiopia (CBE);
C. “Brand Positioning” means a unique space a brand occupies in the minds of customers or target market by associating emotions, traits, feelings and sentiments with it which makes it stand out from competitions;
D. “Business Entities” means a natural persons or organizations that are engaged in business or trading activities;
E. “Client Service Team” means a team that acts as a liaison between the bank and its customers and serve end-to-end needs of customers;
F. “Corporate Customers” means customers having better investable assets, trading transaction and return from business and high contribution for the bank’s profit. They are the upper class of wholesale banking customer segments of the bank;
G. “Customer Experience” means customers’ collective experience in interacting with various touch points of the bank or the accumulation of all the interactions that a customer perceived along the entire journey;
H. “Customer Facing Division” means unit of the bank which interacts with customers through all touch points, serve their needs and solve their problems on continuous basis;
I. “Customer Segmentation” means the approach of classifying a large and diverse customer of the bank to smaller groups based on related traits in order to identify and choose the most profitable customer groups to focus on;
J. “Customer Service” means giving support to customers during the use of the Banks products and services that help them to have a convenient and value adding exercise through all service channels;
K. “Customer Value Proposition” means the value that the bank promises to deliver to its customers and that clearly explain the bank’s customers experience when they do business with the bank;
L. “Customers” means wholesale Banking customers;
M. “Digitization” means the process of automating manual and time-consuming processes into digital formats with the adoption of technology;
N. “Hot lead’’ is someone who has an interest in the banks product, trusts the bank, and really just needs a small nudge to make the final decision. These leads want our product or service now and are willing and able to buy from us. A hot lead has a clear timeframe they are working within to implement the banks product or service as a solution to their problem;
O. “Institutional Customers” means wholesale Banking customers encompassing non- government organs, associations, regional and international organizations, embassies,
Po b lecture 4 macro economics and regulation students(1)Diana Shore
This document provides an overview of macroeconomic principles and business regulation. It discusses Porter's Diamond model of national competitive advantage and factor mobility theory. It also examines business cycles, the role of government and regulation in stimulating the economy. Both the pros and cons of regulation are considered, including how it can create efficient markets but also stifle creativity. Different regulatory bodies in the UK are outlined.
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The document discusses a presentation about productivity, technology, and the global economy. It notes that productivity increased at different rates from 1870-1950, 1950-1973, and 1973-1993. It questions why technology takes time to impact productivity and how the rate of diffusion varies between industries. It also discusses how the world economy became globalized in the 1990s, driven by developments in technology and the deregulation of financial markets. This led to the rise of internet and information technology industries in the US.
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The document discusses a presentation about productivity, technology, and the global economy. It notes that productivity increased at different rates from 1870-1950, 1950-1973, and 1973-1993. It questions why technology takes time to impact productivity and how the rate of diffusion varies between industries. It also discusses how the world economy became globalized in the 1990s, driven by developments in technology and the deregulation of financial markets. This led to the rise of internet and technology companies as well as increased financial volatility.
ICMA has prepared a paper for policy makers about why corporate bond markets are so important for economic growth, for investors, for companies, and for governments, around the world; and why it is therefore essential that laws and regulations that affect them avoid any unintended adverse consequences that could inhibit those markets.
This document provides an overview and introduction to international financial management for multinational corporations (MNCs). It discusses the goal of MNCs to maximize shareholder wealth and conflicts that can interfere with this goal such as agency problems. Several theories that justify international business are presented, including comparative advantage and product cycle theory. Common methods for conducting international business like exporting, licensing, and foreign direct investment are explained. The document also outlines opportunities and risks associated with international operations as well as how an MNC's financial decisions can impact its valuation.
This document provides an overview of consumer protection in the financial systems of India, the UK, and the US. It discusses the need for financial consumer protection, including issues like informational asymmetry, externalities and systemic risk, consumers' irrational behavior, and high search costs. It then examines how consumer protection is managed in each country, including oversight bodies, financial literacy programs, legal/regulatory frameworks, and redressal systems. The document finds that while all countries aim to treat consumers fairly, protections differ in areas like privacy, competition, and vulnerable group support. It concludes by providing suggestions to improve consumer protection in India, such as increasing financial education, protecting vulnerable groups, and reforming commissions.
A Construct Validity of Investment Decision in the Banking Sector in Libya (A...IOSR Journals
Investment decision is an important part of strategic decision making. This is because such decision has involves the allocation of money as is known currently over a period of time, in order to make a profit in future and also be subject to different degrees of risk and uncertainty. However, this paper has an objective to validate the measurements of investment decision in the banking sector in Libya. Moreover, this paper provides comprehensive information on the investment decision in Libyan commercial banks, as well as gaining an understanding on the dimensions of customers’ decisions to invest. Structural equation modeling using 2nd order CFA was employed to validate the measurements. The findings confirmed financial ability, perceived usefulness, product and company attributes and knowledge and past experiences as dimensions of investment decision. The present study has a fundamental contribution as a role model for the investment decision measurements in Libya.
The document presents findings from a study on the effect of the 2008 financial crisis on investors' investment patterns in India. The study found that while the crisis impacted some sectors more than others, investors remain optimistic about the long-term growth prospects of both the Indian and US economies. Most preferred future investment sectors included services and savings accounts.
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- Research shows only 11% of companies deliver expected ROI on major projects 90-100% of the time. Case studies of companies like Woodside Petroleum and Greyhound Lines demonstrate how project delays can reduce share prices.
- While anecdotal, practicing good project management through technologies like PPM does not guarantee higher share prices. However, project failures are more likely to result in lower share prices as investors respond negatively to missed deadlines and losses. Successful projects like Emirates Stadium and those
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In a tight labour market, job-seekers gain bargaining power and leverage it into greater job quality—at least, that’s the conventional wisdom.
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1.2. Definition of Terms
In this guideline, unless the context requires otherwise;
A. “Account planning” means an activity that involves conducting in-depth reviews of current activity and future sales prospects for each major client and/or prospects of the bank. It is the process of building strategic plans to improve value-driven relationships with our key clients that can help to gain a more in-depth understanding in long-term development and retention, thereby maximizing the banks revenue potential;
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Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting, 8th Canadian Edition by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Ebook Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Pdf Solution Manual For Financial Accounting 8th Canadian Edition Pdf Download Stuvia Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Financial Accounting 8th Canadian Edition Ebook Download Stuvia Financial Accounting 8th Canadian Edition Pdf Financial Accounting 8th Canadian Edition Pdf Download Stuvia
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
2. Elemental Economics - Mineral demand.pdfNeal Brewster
After this second you should be able to: Explain the main determinants of demand for any mineral product, and their relative importance; recognise and explain how demand for any product is likely to change with economic activity; recognise and explain the roles of technology and relative prices in influencing demand; be able to explain the differences between the rates of growth of demand for different products.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
1. Elemental Economics - Introduction to mining.pdfNeal Brewster
After this first you should: Understand the nature of mining; have an awareness of the industry’s boundaries, corporate structure and size; appreciation the complex motivations and objectives of the industries’ various participants; know how mineral reserves are defined and estimated, and how they evolve over time.
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2. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Objectives
• To find out why banks are assigned special
importance and why banking is more regulated than
other business
• To consider the types of risk a bank is exposed to
• To consider the pros and cons of banking regulation
7-2
(cont.)
3. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Objectives (cont.)
• To outline the regulatory functions and the forms of
banking regulation
• To evaluate the Basel I and Basel II accords
7-3
4. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Why banks are important
• Banking regulation centres on the objective of
minimising the possibility of bank failure because
banks command more importance than other
financial and non-financial firms
• The failure of banks creates more turmoil in the
economy than perhaps any other kind of firm
7-4
5. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Reasons for the special importance of banks
• The difference between the degrees of liquidity of
their assets and liabilities, which makes them highly
vulnerable to depositor withdrawal and bank runs in
extreme cases
• Banks are at the centre of the payment system (they
are the creators of money, the medium of exchange)
7-5
(cont.)
6. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Reasons for the special importance of banks
(cont.)
• They face an asymmetric loss function, which is a
consequence of handling other people’s money
• The sheer size of the interbank market, resulting
from the fact that banks deal with each other on a
massive scale
7-6
(cont.)
7. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Reasons for the special importance of banks
(cont.)
• The failure of banks leads to a reduction in credit
flows to the rest of the economy, and hence adverse
economic consequences
• The levels of turnover and product innovation are
high, making it unlikely that employees would
experience full business and product cycles
7-7
8. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The kinds of risk facing banks
• Financial risk
Credit risk
Market risk
• Interest rate risk
• Foreign exchange risk
• Equity price risk
• Commodity price risk
• Energy price risk
• Real estate price risk
7-8
(cont.)
9. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The kinds of risk facing banks (cont.)
• Non-financial risk
Operational risk
Other kinds of non-financial risk
7-9
10. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Examples of operational risk
• Liquidity risk
• Herstatt risk
• Compliance risk
• Processing risk
• System risk
• Human resources risk
7-10
(cont.)
11. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Examples of operational risk (cont.)
• Crime risk
• Disaster risk
• Fiduciary risk
• Model risk
• Legal risk
7-11
12. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Examples of other non-financial risk
• Business risk
• Reputational risk
• Macroeconomic risk
• Business cycle risk
• Country risk
• Political risk
• Sovereign risk
• Purchasing power risk
7-12
13. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Operational risk
• The risk of loss resulting from the failure of people,
processes, systems or from external events.
• It is more diverse than either credit risk or market risk
7-13
14. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Types of operational loss events
Event Definition Example
Internal fraud Losses due to acts of fraud
involving at least one
internal party.
Bribes, credit fraud and theft
External fraud Same as internal fraud
except that it is carried out
by an external party.
Computer hacking and forgery
Employment
practices and
workplace safety
Losses arising from
violation of employment
and health and safety
laws.
Discrimination
Clients, products
and business
practices
Losses arising from failure
to meet obligations to
clients or from the design
of a product.
Product defects and misuse of
confidential information
Damage to
physical assets
Losses arising from
damage inflicted on
physical assets by a
natural disaster or another
event.
Terrorism, vandalism and
natural disasters
Business
disruption and
system failures
Losses arising from
disruptions to or failures in
systems,
telecommunication and
utilities.
Hardware, software and
telecommunications
Execution,
delivery and
process
management
Losses arising from failed
transaction processing
with counterparties such
as vendors
Negligent loss or damage of
client assets and unapproved
access to accounts
7-14
15. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Operational risk in the FX market
• One reason for the increasing level of operational
risk encountered in executing foreign exchange
transactions is increasing diversity of the foreign
exchange market, which is no longer dominated by
commercial banks
7-15
(cont.)
16. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Operational risk in the FX market (cont.)
• The level of operational risk in the foreign exchange
market has risen also because the increasing
complexity and size of the market have made it
necessary to introduce regular changes in trading
procedures, trade capture systems, operational
procedures and risk management tools
7-16
17. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Justification for banking regulation
• Banking regulation can be justified on the basis of
market failure such as externalities, market power,
and asymmetry of information between buyers and
sellers
• The second justification for banking regulation is the
inability of depositors to monitor banks
7-17
18. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Arguments against banking regulation
• Some economists dispute the arguments typically
presented in favour of bank regulation
• There is significant scepticism about the role of
regulation as a means of achieving financial stability
• Regulators do not take into account the fact that risk
creates value and that profits come from taking risk
7-18
19. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Regulation in the post-crisis era
• While the proponents of banking regulation argue
that their views have been vindicated by the global
financial crisis, those who hold opposite views still
argue otherwise
• Some proponents of free banking assert that the
impact of the crisis would have been worse if it were
not for deregulation
7-19
20. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Regulatory functions
• Macroprudential supervision is intended to limit
financial system distress that might damage the
economy
• Microprudential supervision focuses on the solvency
of individual institutions rather than the whole system
• Conduct-of-business regulation is also justified in
terms of consumer protection
7-20
21. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Segregation of regulatory functions
• The segregation of regulatory functions (for example,
between APRA and the RBA in Australia) is a
controversial issue on which there is no consensus
• Some would argue that one lesson learned from the
global financial crisis pertains to the segregation of
supervisory roles, particularly between central banks
and other supervisors
7-21
22. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Forms of banking regulation
• Deposit insurance: Arguments against are moral
hazard and adverse selection
• Operations regulation, including loans (highly
leveraged activities), investment in securities and off-
balance sheet transactions
7-22
(cont.)
23. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Forms of banking regulation (cont.)
• Regulation of the accounting process, which became
necessary following the accounting scandals at
Enron and WorldCom
• In 2002, the Sarbanes-Oxley Act was implemented
in the United States to make corporate managers,
board members and auditors more accountable for
the accuracy of the financial statements of their firms
7-23
(cont.)
24. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Forms of banking regulation (cont.)
• Capital-based regulation requires banks to be
subject to capital requirements, holding a minimum
capital ratio, which is the ratio of capital to total
assets
• This is the basis of the Basel accords
7-24
25. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Global banking regulation
• The Basel accords
• The US International Banking Act of 1978
• The Single European Act of 1987
7-25
26. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Capital and related concepts
• Capital is simply the arithmetic difference between
assets and liabilities, which is also known as net
worth or shareholders’ equity
• Thus, a bank is solvent if the difference between
assets and liabilities is positive and vice versa
7-26
(cont.)
27. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Capital and related concepts (cont.)
• Economic capital is the capital that a firm must hold
to protect itself against insolvency with a chosen
level of certainty over a given period of time
• Regulatory capital is determined by regulators, for
example, as a given percentage of the risk-weighted
value of assets
7-27
(cont.)
28. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Capital and related concepts (cont.)
• Capital adequacy refers to the requirement that banks
hold adequate capital to protect themselves against
insolvency
7-28
(cont.)
29. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Capital and related concepts (cont.)
• The capital ratio and the risk-adjusted capital ratio
are calculated as follows:
A
K
k
A
K
k
n
i
i
n
i
i
i
w
A
w
A
1
1
7-29
(cont.)
30. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Capital and related concepts (cont.)
• The risk-adjusted rate of return on capital is
calculated as:
K
RAROC
7-30
(cont.)
31. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Capital and related concepts (cont.)
• Regulatory capital arbitrage is a process whereby
banks exploit differences between a portfolio’s true
economic risk and regulatory risk by, for example,
shifting the portfolio’s composition towards high-
yield, low-quality (or high-risk) assets
7-31
32. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The Basel Committee
• The BCBS was established in 1974 following the
collapse of Bankhaus Herstatt
• The BCBS does not have any supranational
authority with respect to banking supervision, and
this is why its recommendations and standards do
not have legal force
7-32
33. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Functions of the Basel Committee
• Defining the role of regulators in cross-jurisdictional
situations
• Ensuring that international banks do not escape
comprehensive supervision by the domestic
regulatory authority
• Promoting uniform capital requirements so that
banks from different countries may compete with
each other on a ‘level playing field’
7-33
34. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The Basel I Accord
• In 1988, the BCBS established the Basel I Accord
for measuring capital adequacy for banks
• The objective of Basel I were:
(i) to establish a more ‘level playing field’ for
international competition among banks
(ii) to reduce the probability that such competition
would lead to bidding down of capital ratios to
excessively low levels
7-34
35. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Requirements of Basel I
• Banks are required to hold as capital an amount of
no less than 8% of their risk-weighted assets
• The capital ratio, k, can be calculated as:
08
.
0
CR
K
k
7-35
36. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel I
• It has very limited sensitivity to risk, giving rise to a
gap between regulatory capital as assigned by the
regulators, and economic capital as required by
market forces
7-36
(cont.)
37. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel I (cont.)
• Failure to differentiate between high-quality and low-
quality assets within a particular asset classes (such
as commercial and industrial credit) contributed to a
steady increase in the credit risk of bank loan
portfolios
7-37
(cont.)
38. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel I (cont.)
• Adding up the credit risks of individual assets
ignores gains from diversification across less-than-
perfectly correlated assets
7-38
(cont.)
39. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel I (cont.)
• The initial exclusion of market risk from capital
requirements and high regulatory costs induced
banks to shift their risk exposure (via securitisation)
from priced credit risk to unpriced market risk
7-39
(cont.)
40. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel I (cont.)
• It completely ignores operational risk. This sounds
odd when it has become a consensus view that
operational risk can be detrimental to the wellbeing
of a bank or any business firm for that matter
7-40
(cont.)
41. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel I (cont.)
• The Accord gives very limited attention to credit
risk mitigation despite the availability of risk
management tools such as credit derivatives
7-41
(cont.)
42. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel I (cont.)
• Basel I did not have the provisions to adequately
measure credit risk in the mortgage market,
creating disincentives for banks to purchase
mortgage insurance and encouraging the issuance
of uninsured mortgages
7-42
43. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The Basel II Accord
• In response to the criticism of the Basel I Accord and
to address changes in the banking environment that
the 1988 Accord could not deal with effectively, the
BCBS decided to create a new capital accord, Basel II
7-43
44. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Requirements
• While retaining the key elements of the Basel I
Accord, including the general requirement that
banks ought to hold a regulatory capital ratio of at
least 8% of their risk-weighted assets, Basel II
provides a range of options for determining capital
requirements, allowing banks to use approaches
that are most appropriate for their operations
7-44
45. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The capital ratio under Basel II
• Because Basel II accounts for operational risk, the
capital ratio formula becomes:
08
.
0
OR
MR
CR
K
k
7-45
46. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The pillars of Basel II
• The Basel II Accord has three pillars:
(i)minimum regulatory capital requirements
(ii) the supervisory review process
(iii) market discipline through disclosure requirements
7-46
47. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against credit risk under
Basel II
• The standardised approach is structurally similar to
what is found in the 1988 Accord. Banks are
required to classify their exposures into broad
categories, such as the loans they have extended
to corporate and sovereign borrowers and other
banks
7-47
(cont.)
48. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against credit risk under
Basel II (cont.)
• Under the internal-ratings based approach, banks
may use their own internal estimates of credit risk
to determine the regulatory capital for a given
exposure
• Internal models are designed to estimate or predict
the constituent components of credit risk:
(i) probability of default (PD)
(ii) loss given default (LGD)
(iii)exposure at default (EAD)
7-48
49. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against market risk under
Basel II
• Two approaches are used to measure market risk:
(i) the standardised approach
(ii)the internal models approach
• To be eligible for the use of internal models, a bank
must satisfy certain conditions
7-49
50. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against operational risk
under Basel II
• Under the basic indicators approach, banks must
hold capital against operational risk that is equal to
the average of the previous three years of a fixed
percentage of positive annual gross income:
n
y
K
n
i
i
1
7-50
(cont.)
51. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against operational risk
under Basel II (cont.)
• Under the standardised approach, regulatory capital
for the whole bank is calculated as a three-year
average of the simple sum of capital charges of
individual business lines in each year:
3
0
3
1
8
1
t j
jt
j ]
,
y
max[
K
7-51
(cont.)
52. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The Betas of business lines
7-52
53. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against operational risk
under Basel II (cont.)
• According to the advanced measurement approach
(AMA), regulatory capital is calculated by using the
bank’s internal operational risk models
7-53
(cont.)
54. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against operational risk
under Basel II (cont.)
• The Basel II Accord allows three alternative
approaches under the AMA:
(i) the loss distribution approach (LDA)
(ii) the scenario-based approach (SBA)
(iii)the scorecard approach (SCA), which is also
called the risk drivers and controls approach
(RDCA)
7-54
(cont.)
55. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Calculating capital against operational risk
under Basel II (cont.)
• A bank’s regulatory capital can be calculated from
the capital charges of individual business units by
adding them up under the assumption of zero
correlation. Otherwise, the loss data can be
combined to calculate regulatory capital for the
whole bank from a single loss distribution, in which
case we assume perfect correlation
7-55
56. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel II
• Basel II represents inappropriate or inadequate
financial supervision. While capital adequacy
requirements are designed to protect banks from
insolvency, the problems faced by banks during the
onslaught of the global financial crisis were illiquidity
and leverage
7-56
(cont.)
57. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel II (cont.)
• Banks should not be regulated in the same way as
they are managed. The objective of aligning
regulatory capital with economic capital (which
implies running the bank the same way as regulating
it) is way off the mark
7-57
(cont.)
58. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel II (cont.)
• The resulting risk-sensitive capital requirements
enhance procyclicality of the banking system
• Over-reliance on the ratings of the rating agencies to
determine the riskiness of assets sounds ludicrous in
the post-crisis era
7-58
(cont.)
59. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel II (cont.)
• Business and reputational risks, which are not
recognised by Basel II, may be more significant than
the direct operational losses that the banking
industry has been asked to monitor
• By increasing its complexity, pillar 1 does not
necessarily make the regulation more accurate
7-59
(cont.)
60. Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Criticism of Basel II (cont.)
• As far as operational risk is concerned, pillar 1 is
criticised on the grounds that operational risk
modelling is not possible in the absence of
comprehensive databases
• The basic indicators approach is criticised for the
calculation of the capital charge as a percentage of
gross income
7-60