RWA Credit
Total capital ≥ 8% + [MRCMarket × 12.5]+[ORCOpr'l × 12.5]
• Undisclosed reserves • Asset revaluation reserves Tier 2 • General provisions or “Supplementary” loan loss reserves (only here in Tier 2) 2) • Hybrid debt capital instruments (Cumulative preferred stock) • Subordinated term debt
capital: issued & Tier 1 • Equity capital: issued “Core” fully paid common stock • Non-cumulative, non-redeemable preferred stock • Disclosed reserves • (Excludes Goodwill)
Credit Risk Operational Operational Risk Market Risk Tier 3 • To meet market risk capital requirements only • Short-term subordinated debt • Maturity at least 2 years • With covenant limiting payment if impairs impairs bank’s bank’s capital capital requirement
Credit Risk
Operational Risk External Rating
Standardized
Basic Indicator Approach (BIA)
∑
Claim Type
K Operational ,BIA =
$100 MM loan × 20% (AAA) × 8% capital = $1.6 MM $100 MM loan × 100% ( BB-) × 8% capital = $8.0 MM Three Elements (IRB) 1. Risk Components 2. Risk-weight functions 3. Minimum requirements
i =last three years
(GI i × α )
3
Standardized Approach (SA)
Internal Estimate
ASA
Retail ◄ Volume ∑ max [∑ (GI lines 1−8 × βlines 1-8 ),0 ] Comm’l◄ Volume i =last three years K SA =
Foundation IRB
3
Corporate, Sovereign & Bank Exposures
Advanced Measurement Approach (AMA)
PD EAD LGD M
• Capital for UL only • EL with provisions
Have
RWA=12.5 × EAD × K K = LGD × PD × f(M)
1. Residential Mortgage 2. Qualifying Revolving 3. Small Bus Loans
Internal External Scenario Data Data Analysis
Controls & Tools
Internal Measurement Approach (IMA)
Different IRB Treatment
Retail
Elements Should Have
Elements Must
Equities
Advanced IRB Supervisor Supplied
γ (i,j) ∗ EI(i , j ) ∗ PE(i , j ) ∗ LGE(i , j ) Loss Distribution Approach (LDA)
Scorecard Approach
Purchased Receivables
Securitization
Correlations
Market Risk
Scope Mitigation (CRM)
Mitigation
Trading Book Fixed-Income
Standardized Simple
True-sale conditions: 1. risk to 3rd party 2. seller doesn’t control 3. securities not obligations 4. SPE holder rights
Substitute Collateral Risk Weight
Comprehensive
Tranche
E* = (E + H) - (C - H - Hfx)
Foundation
Derivatives
Senior: 45% LGD Subord: 75% LGD
Foundation
LGD
Currencies
Currencies
Commodities
Commodities
LGD
External Ratings-based (RBA)
Supervisory Formula (SF)
Advanced LGD
Standardized (sum the building blocks)
MRCtStandard = ∑ IR,EQ,FX ,CO,OP MRCt
IRB Approach
E* E
Banking Book
External Rating
Reduce Exposure by Collateral (+ haircuts)
Collateral
Equities
Internal Assessment Approach (IAA)
Internal Models Approach (IMA) Qualitative Requirements
VaR
• 10 day horizon • 99% confidence • One year of data • Quarterly updating
Stress Testing Backtesting Green: <5 exceptions Yellow: 5-9 Red: 10+
k+ 0.4 1.0
Credit Risk External Rating
Standardized Claim Type
$100 MM loan × 20% (AAA) × 8% capital = $1.6 MM $100 MM loan × 100% (BB-) × 8% capital = $8.0 MM
Three Elements (IRB) 1. Risk Components 2. Risk-weight functions 3. Minimum requirements
Internal Estimate
Foundation IRB
Corporate, Sovereign & Bank Exposures • Capital for UL only • EL with provisions
PD EAD LGD M
RWA=12.5 × EAD × K K = LGD × PD × f(M)
Different IRB Treatment
Retail 1. Residential Mortgage 2. Qualifying Revolving 3. Small Bus Loans
Equities
Advanced IRB Supervisor Supplied
Purchased Receivables
Mitigation (CRM)
Securitization
Standardized Simple
True-sale conditions: 1. risk to 3rd party 2. seller doesn’t control 3. securities not obligations 4. SPE holder rights
Substitute Collateral Risk Weight
Comprehensive
External Rating
Reduce Exposure by Collateral (+ haircuts)
Tranche
E* = (E + H) - (C - H - Hfx)
IRB Approach Foundation
Derivatives
Senior: 45% LGD Subord: 75% LGD
Foundation
Collateral
LGD
E* E
LGD
External Ratings-based (RBA)
Supervisory Formula (SF)
Advanced LGD
Internal Assessment Approach (IAA)
Market Risk
Scope Trading Book Fixed-Income Equities
Banking Book
Currencies
Currencies
Commodities
Commodities
Standardized (sum the building blocks) Standard MRC t
=∑
IR,EQ,FX ,CO,OP
MRCt
Internal Models Approach (IMA) Qualitative Requirements
VaR
• 10 day horizon • 99% confidence • One year of data • Quarterly updating
Stress Testing Backtesting Green: <5
exceptions
Yellow: 5-9 Red: 10+
k+ 0.4 1.0
Operational Risk Basic Indicator Approach (BIA)
∑
K Operational ,BIA =
i =last three years
(GI i × α )
3
Standardized Approach (SA)
ASA
Retail ◄ Volume ∑ max [∑(GI lines 1−8 × βlines 1-8 ),0] Comm’l◄ Volume i =last three years K SA = 3
Advanced Measurement Approach (AMA) Elements Should Have
Elements Must Have
Internal External Scenario Data Data Analysis
Controls & Tools
Internal Measurement Approach (IMA)
γ (i,j) ∗ EI(i , j )
Mitigation
∗ PE(i, j) ∗ LGE( i , j)
Loss Distribution Approach (LDA)
Scorecard Approach
Correlations
Second Pillar Key principles of supervisory review 1. Rigorous bank process • • • • •
Board, Sr mgmt oversight Capital assessment Total risk assessment Monitoring & reporting Internal control review
3. Supervisor response
2. Supervisor review • • • • •
Good targets, processes Captial adequacy Control envirnonment Min. standard compliance Response (as needed)
4. Supervisor intervention
Specific Issues to be Addressed • Banking book interest rate risk
Credit Risk • • • • •
IRB stress tests Definition of default Residual risk Concentration risk Counterparty risk
Operational Risk
Market Risk
• Gross income as proxy • • • •
Trading book eligibility Valuation IMA: Stress testing IMA: Specific risk model
Third Pillar Qualitative disclosures
Quantitative disclosures Tier 1 with breakdowns, Tier 2 & 3, deductions, total eligible
Capital structure Capital adequacy
Credit risk, equity in IRB, market risk, operational risk, Total & Tier 1
Risk exposure and assessment General qualitative disclosure • strategies & processes • organization of risk mgmt function • scope & nature of risk reporting & measurement • Policies for, and monitoring of, hedging & mitigation
Credit risk
definitions of past due, impaired; allowance approaches, policies
Additional requirement under IRB approaches
Market risk
capital requirements for: interest rate risk, equity position, FX and commodity
Operational Risk
description of approaches; if AMA, factor and insurance
Banking book equities investment values, public/private, gain/loss from sale, req by group
Banking interest rate
value change for rate shock, broken down by currency
