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.
The document provides information on the Bank for International Settlements (BIS) and the Basel I accord. It discusses that BIS was established in 1930 by central banks and continues to serve as a forum for international cooperation on banking supervision. Basel I, released in 1988, was the first international banking accord that set minimum capital requirements for credit risk. It established risk weights for various types of assets and exposures. However, it only addressed credit risk and was later improved by Basel II and III.
This lecture discusses international banking and the associated risks. It begins by defining international banking as transactions crossing national boundaries. It then examines reasons for the growth of international banking since the 1960s. The key risks discussed are sovereign risk, risks in the international interbank market, and currency risk. Historical banking crises are reviewed like the Latin American debt crisis in the 1980s and Asian Financial Crisis in 1997 to highlight lessons learned about risks in unregulated international banking.
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
Banks play several important roles in an economy. They act as financial intermediaries by taking deposits from savers and lending to borrowers. This intermediation role helps allocate funds to their most productive uses. Banks also reduce transaction costs for both savers and borrowers. Additionally, banks provide important services like liquidity, payment systems, risk pooling, and monitoring of borrowers, which supports economic activity. While some argue banks are unnecessary in a perfect market, evidence shows banks remain central to economic growth in reality due to market imperfections.
Basel II is an international standard that aims to strengthen the regulation, supervision and risk management within the banking sector. It improves upon Basel I by making capital requirements more risk sensitive and aligning regulatory capital more closely with underlying bank risks. Basel II consists of three pillars that cover minimum capital requirements, supervisory review, and market discipline. Implementation of Basel II varies across countries and regulators but aims to modernize capital adequacy standards to be more comprehensive and risk sensitive.
This presentations chalks out in detail information about ALM in Indian Bank. It starts with the basics of Balance sheet; applicability of ALM in real life; Evolution and then starts with main topics of ALM like structured statement; Liquidity risk, its management; currency risk and finally ends with Interest Risk management.
Links to Video’s in the ppt
Balance Sheet
http://www.investopedia.com/terms/b/balancesheet.asp
NII/NIM
http://www.investopedia.com/terms/n/netinterestmargin.asp
www.abhijeetdeshmukh.com
The document provides information on the Bank for International Settlements (BIS) and the Basel I accord. It discusses that BIS was established in 1930 by central banks and continues to serve as a forum for international cooperation on banking supervision. Basel I, released in 1988, was the first international banking accord that set minimum capital requirements for credit risk. It established risk weights for various types of assets and exposures. However, it only addressed credit risk and was later improved by Basel II and III.
This lecture discusses international banking and the associated risks. It begins by defining international banking as transactions crossing national boundaries. It then examines reasons for the growth of international banking since the 1960s. The key risks discussed are sovereign risk, risks in the international interbank market, and currency risk. Historical banking crises are reviewed like the Latin American debt crisis in the 1980s and Asian Financial Crisis in 1997 to highlight lessons learned about risks in unregulated international banking.
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
Banks play several important roles in an economy. They act as financial intermediaries by taking deposits from savers and lending to borrowers. This intermediation role helps allocate funds to their most productive uses. Banks also reduce transaction costs for both savers and borrowers. Additionally, banks provide important services like liquidity, payment systems, risk pooling, and monitoring of borrowers, which supports economic activity. While some argue banks are unnecessary in a perfect market, evidence shows banks remain central to economic growth in reality due to market imperfections.
Basel II is an international standard that aims to strengthen the regulation, supervision and risk management within the banking sector. It improves upon Basel I by making capital requirements more risk sensitive and aligning regulatory capital more closely with underlying bank risks. Basel II consists of three pillars that cover minimum capital requirements, supervisory review, and market discipline. Implementation of Basel II varies across countries and regulators but aims to modernize capital adequacy standards to be more comprehensive and risk sensitive.
This presentations chalks out in detail information about ALM in Indian Bank. It starts with the basics of Balance sheet; applicability of ALM in real life; Evolution and then starts with main topics of ALM like structured statement; Liquidity risk, its management; currency risk and finally ends with Interest Risk management.
Links to Video’s in the ppt
Balance Sheet
http://www.investopedia.com/terms/b/balancesheet.asp
NII/NIM
http://www.investopedia.com/terms/n/netinterestmargin.asp
www.abhijeetdeshmukh.com
The document discusses managing interest rate risk in banks, including defining interest rate risk, describing the types of interest rate risks such as repricing risk and basis risk, and strategies for measuring and controlling interest rate risk such as following Basel Committee recommendations and sound risk management practices.
Chapter 3 Depository Institutions: Activities and CharacteristicsNardin A
Chapter 3 Depository Institutions: Activities and Characteristics
Foundations of Financial Markets and Institutions 4th edition 2009
Frank J. Fabozzi
Franco Modigliani
Frank J. Jones
The webinar will provide enriching insights of Credit appraisal, why it is required and the advantages of the same. The key areas of elucidation will include banker's preference for credit appraisal, traditional method Vs current trends, understanding various business models. The discussion shall also include the role of Chartered Accountants in credit appraisal, the edge CA's have over others and also the added advantages it brings in to their professional practise.
This document discusses various types of risks faced by banks, including credit risk, market risk, operational risk, liquidity risk, and reputation risk. It provides definitions of different risk types such as credit risk, concentration risk, and interest rate risk. The document also covers topics like the importance of credit risk management, factors to consider in credit risk analysis, and modern approaches to assessing and managing credit risk in the banking industry.
This document discusses the management of interest rate risk in banks. It defines interest rate risk and explains the main sources of this risk for banks, including re-pricing risk, basis risk, embedded option risk, and yield curve risk. The document then discusses tools for analyzing and measuring interest rate risk, such as gap analysis, simulation models, and rate shift scenarios. Managing interest rate risk is important for banks since their main source of profit relies on the difference between the interest rates paid on liabilities and earned on assets.
Commercial credit analysis can introduce a lot of complexities into the banking organization: additional underwriting standards, new financial data to collect and interpret, complex relationships with multiple entities and commingled incomes, additional regulatory focus, etc.
Sageworks Senior Consultant Peter Brown covers some of the basics that come with credit analysis including what data to consider, how to analyze the data, when to introduce benchmarking and automation and other topics.
An investment bank is a financial institution that assists corporations, governments, and individuals in raising capital by underwriting securities or facilitating mergers and acquisitions. The document discusses different types of investment banks such as bulge bracket, middle market, and boutique banks. It also outlines the key functions of investment banks such as capital markets activities, mergers and acquisitions advisory, and asset management.
This document discusses operational risk management. It begins with definitions of operational risk and management of operational risk. It then lists common causes of operational risk including internal and external fraud, employment practices, clients/products, damage to assets, business disruption, execution errors, highly automated technology, e-commerce, outsourcing, and mergers and acquisitions. It discusses approaches to calculating capital charges for operational risk under the basic indicator, standardized, and advanced measurement approaches. It also outlines factors for assessing and measuring operational risk events, monitoring operational risk, and data needs for operational risk management. Finally, it discusses management tasks related to operational risk mitigation and the typical organizational set-up for operational risk management.
This document discusses asset liability management (ALM) in banks. It begins by defining the components of a bank's balance sheet, including assets like cash, investments, advances, and fixed assets, as well as liabilities like capital, deposits, and borrowings. It then explains a bank's profit and loss account. The document traces the evolution of ALM from a focus on assets to incorporating liability management and interest rate risk. It defines ALM as managing a bank's balance sheet to allow for different interest rate and liquidity scenarios. Finally, it discusses the key risks managed by ALM - liquidity risk, currency risk, and interest rate risk - and some tools used, including maturity ladder analysis, duration, simulation,
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
The study examined credit risk and management in Nigeria Commercial Banks. From the findings it
is concluded that banks profitability is inversely influenced by the levels of loans and advances, non-performing
loans and deposits thereby exposing them to great risk of illiquidity and distress. Therefore, management need
to be cautious in setting up a credit policy that will not negatively affects profitability and also they need to
know how credit policy affects the operation of their banks to ensure judicious utilization of deposits and
maximization of profit. Improper credit risk management reduce the bank profitability, affects the quality of its
assets and increase loan losses and non-performing loan which may eventually lead to financial distress. CBN
for policy purposes should regularly assess the lending attitudes of commercial banks. One direct way is to
assess the degree of credit crunch by isolating the impact of supply side of loan from the demand side taking
into account the opinion of the firms about banks’ lending attitude.
This document discusses liquidity risk and how banks must ensure they have sufficient liquid assets to meet obligations. It outlines various sources of liquidity risk including strategic decisions, reputation issues, market trends, and specific products. It also describes different types of liquidity risk such as asset liquidity risk and funding liquidity risk. Additionally, it discusses liquidity black holes that can develop when the entire market moves to sell assets, exacerbating liquidity issues.
The document discusses liquidity risk, which can be defined as a bank's ability to meet its short-term obligations. It is measured over a specific time horizon and depends on factors like a bank's cash inflows and outflows. Liquidity risk is affected by both external market characteristics and internal factors specific to a bank's positions. Reporting on liquidity risk involves reconciling accounting and liquidity data, projecting contractual cash flows, and analyzing liquid assets, funding sources, and leading indicators of liquidity issues.
This document discusses stress testing frameworks and critical success factors. It covers topics such as stress testing models, scenarios, risk types, aggregation, business impacts, and mitigation plans. The key aspects are robust stress testing models across all material risk types, senior management buy-in and use of insights to address issues, and embedding stress testing into the decision-making process consistently across the organization. Data reconciliation and clearly defined scenarios are also important factors.
The CAMELS model is used by bank regulators to evaluate a bank's performance. The six factors evaluated are Capital adequacy, Asset quality, Management quality, Earnings ability, Liquidity, and Sensitivity to market risk. Each factor is scored 1-5 with 1 being the strongest rating. An overall composite rating is also given from 1-5. The document then provides details on how each of the six factors are evaluated.
The document provides an acknowledgement for the completion of a report. It thanks various individuals who provided cooperation and assistance at different stages of the report, including the supervisor Mr. Asad Shahjan for helping with selecting a topic during a time of confusion. It also thanks staff members of Bank Islami Branch Mansehra for providing guidance and valuable information, especially the operational manager Mr. Shafqat Hussain. Finally, it expresses gratitude to Allah for giving the strength to fulfill the task efficiently.
international banking and the Basel accordsAsadAli104515
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 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.
The document discusses managing interest rate risk in banks, including defining interest rate risk, describing the types of interest rate risks such as repricing risk and basis risk, and strategies for measuring and controlling interest rate risk such as following Basel Committee recommendations and sound risk management practices.
Chapter 3 Depository Institutions: Activities and CharacteristicsNardin A
Chapter 3 Depository Institutions: Activities and Characteristics
Foundations of Financial Markets and Institutions 4th edition 2009
Frank J. Fabozzi
Franco Modigliani
Frank J. Jones
The webinar will provide enriching insights of Credit appraisal, why it is required and the advantages of the same. The key areas of elucidation will include banker's preference for credit appraisal, traditional method Vs current trends, understanding various business models. The discussion shall also include the role of Chartered Accountants in credit appraisal, the edge CA's have over others and also the added advantages it brings in to their professional practise.
This document discusses various types of risks faced by banks, including credit risk, market risk, operational risk, liquidity risk, and reputation risk. It provides definitions of different risk types such as credit risk, concentration risk, and interest rate risk. The document also covers topics like the importance of credit risk management, factors to consider in credit risk analysis, and modern approaches to assessing and managing credit risk in the banking industry.
This document discusses the management of interest rate risk in banks. It defines interest rate risk and explains the main sources of this risk for banks, including re-pricing risk, basis risk, embedded option risk, and yield curve risk. The document then discusses tools for analyzing and measuring interest rate risk, such as gap analysis, simulation models, and rate shift scenarios. Managing interest rate risk is important for banks since their main source of profit relies on the difference between the interest rates paid on liabilities and earned on assets.
Commercial credit analysis can introduce a lot of complexities into the banking organization: additional underwriting standards, new financial data to collect and interpret, complex relationships with multiple entities and commingled incomes, additional regulatory focus, etc.
Sageworks Senior Consultant Peter Brown covers some of the basics that come with credit analysis including what data to consider, how to analyze the data, when to introduce benchmarking and automation and other topics.
An investment bank is a financial institution that assists corporations, governments, and individuals in raising capital by underwriting securities or facilitating mergers and acquisitions. The document discusses different types of investment banks such as bulge bracket, middle market, and boutique banks. It also outlines the key functions of investment banks such as capital markets activities, mergers and acquisitions advisory, and asset management.
This document discusses operational risk management. It begins with definitions of operational risk and management of operational risk. It then lists common causes of operational risk including internal and external fraud, employment practices, clients/products, damage to assets, business disruption, execution errors, highly automated technology, e-commerce, outsourcing, and mergers and acquisitions. It discusses approaches to calculating capital charges for operational risk under the basic indicator, standardized, and advanced measurement approaches. It also outlines factors for assessing and measuring operational risk events, monitoring operational risk, and data needs for operational risk management. Finally, it discusses management tasks related to operational risk mitigation and the typical organizational set-up for operational risk management.
This document discusses asset liability management (ALM) in banks. It begins by defining the components of a bank's balance sheet, including assets like cash, investments, advances, and fixed assets, as well as liabilities like capital, deposits, and borrowings. It then explains a bank's profit and loss account. The document traces the evolution of ALM from a focus on assets to incorporating liability management and interest rate risk. It defines ALM as managing a bank's balance sheet to allow for different interest rate and liquidity scenarios. Finally, it discusses the key risks managed by ALM - liquidity risk, currency risk, and interest rate risk - and some tools used, including maturity ladder analysis, duration, simulation,
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
The study examined credit risk and management in Nigeria Commercial Banks. From the findings it
is concluded that banks profitability is inversely influenced by the levels of loans and advances, non-performing
loans and deposits thereby exposing them to great risk of illiquidity and distress. Therefore, management need
to be cautious in setting up a credit policy that will not negatively affects profitability and also they need to
know how credit policy affects the operation of their banks to ensure judicious utilization of deposits and
maximization of profit. Improper credit risk management reduce the bank profitability, affects the quality of its
assets and increase loan losses and non-performing loan which may eventually lead to financial distress. CBN
for policy purposes should regularly assess the lending attitudes of commercial banks. One direct way is to
assess the degree of credit crunch by isolating the impact of supply side of loan from the demand side taking
into account the opinion of the firms about banks’ lending attitude.
This document discusses liquidity risk and how banks must ensure they have sufficient liquid assets to meet obligations. It outlines various sources of liquidity risk including strategic decisions, reputation issues, market trends, and specific products. It also describes different types of liquidity risk such as asset liquidity risk and funding liquidity risk. Additionally, it discusses liquidity black holes that can develop when the entire market moves to sell assets, exacerbating liquidity issues.
The document discusses liquidity risk, which can be defined as a bank's ability to meet its short-term obligations. It is measured over a specific time horizon and depends on factors like a bank's cash inflows and outflows. Liquidity risk is affected by both external market characteristics and internal factors specific to a bank's positions. Reporting on liquidity risk involves reconciling accounting and liquidity data, projecting contractual cash flows, and analyzing liquid assets, funding sources, and leading indicators of liquidity issues.
This document discusses stress testing frameworks and critical success factors. It covers topics such as stress testing models, scenarios, risk types, aggregation, business impacts, and mitigation plans. The key aspects are robust stress testing models across all material risk types, senior management buy-in and use of insights to address issues, and embedding stress testing into the decision-making process consistently across the organization. Data reconciliation and clearly defined scenarios are also important factors.
The CAMELS model is used by bank regulators to evaluate a bank's performance. The six factors evaluated are Capital adequacy, Asset quality, Management quality, Earnings ability, Liquidity, and Sensitivity to market risk. Each factor is scored 1-5 with 1 being the strongest rating. An overall composite rating is also given from 1-5. The document then provides details on how each of the six factors are evaluated.
The document provides an acknowledgement for the completion of a report. It thanks various individuals who provided cooperation and assistance at different stages of the report, including the supervisor Mr. Asad Shahjan for helping with selecting a topic during a time of confusion. It also thanks staff members of Bank Islami Branch Mansehra for providing guidance and valuable information, especially the operational manager Mr. Shafqat Hussain. Finally, it expresses gratitude to Allah for giving the strength to fulfill the task efficiently.
international banking and the Basel accordsAsadAli104515
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 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.
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.
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 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.
Chapter 3 Strategic Planning Process (The External Environme.pptNajwaAlyaabintiAbdWa
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.
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.
Corporate Governance Reforms Post Global Financial CrisisSanjay Uppal
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
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.
The Context For Information Technology Since The Late 20th CenturyRitesh Nayak
Review of the book by Manuel Castells. 2000(2nd edition)The Rise of the Network SocietyVolume I of The Information Age: Economy, Society and Culture. Blackwell. pp.77-215
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.
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.
The Context For Information Technology Since The Late 20th CenturySumeet Raj
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.
The Context For Information Technology Since The Late 20th CenturyRitesh Nayak
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.
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.
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.
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.
How to Fix the Import Error in the Odoo 17Celine George
An import error occurs when a program fails to import a module or library, disrupting its execution. In languages like Python, this issue arises when the specified module cannot be found or accessed, hindering the program's functionality. Resolving import errors is crucial for maintaining smooth software operation and uninterrupted development processes.
This presentation was provided by Steph Pollock of The American Psychological Association’s Journals Program, and Damita Snow, of The American Society of Civil Engineers (ASCE), for the initial session of NISO's 2024 Training Series "DEIA in the Scholarly Landscape." Session One: 'Setting Expectations: a DEIA Primer,' was held June 6, 2024.
A workshop hosted by the South African Journal of Science aimed at postgraduate students and early career researchers with little or no experience in writing and publishing journal articles.
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How to Build a Module in Odoo 17 Using the Scaffold MethodCeline George
Odoo provides an option for creating a module by using a single line command. By using this command the user can make a whole structure of a module. It is very easy for a beginner to make a module. There is no need to make each file manually. This slide will show how to create a module using the scaffold method.
How to Make a Field Mandatory in Odoo 17Celine George
In Odoo, making a field required can be done through both Python code and XML views. When you set the required attribute to True in Python code, it makes the field required across all views where it's used. Conversely, when you set the required attribute in XML views, it makes the field required only in the context of that particular view.
This slide is special for master students (MIBS & MIFB) in UUM. Also useful for readers who are interested in the topic of contemporary Islamic banking.
How to Setup Warehouse & Location in Odoo 17 InventoryCeline George
In this slide, we'll explore how to set up warehouses and locations in Odoo 17 Inventory. This will help us manage our stock effectively, track inventory levels, and streamline warehouse operations.
it describes the bony anatomy including the femoral head , acetabulum, labrum . also discusses the capsule , ligaments . muscle that act on the hip joint and the range of motion are outlined. factors affecting hip joint stability and weight transmission through the joint are summarized.
This presentation includes basic of PCOS their pathology and treatment and also Ayurveda correlation of PCOS and Ayurvedic line of treatment mentioned in classics.
Strategies for Effective Upskilling is a presentation by Chinwendu Peace in a Your Skill Boost Masterclass organisation by the Excellence Foundation for South Sudan on 08th and 09th June 2024 from 1 PM to 3 PM on each day.
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
• Risk: Business Risk Financial Risk
• Financial risk : Credit risk, Market risk
Market Risks:
• 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
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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