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Aus Cap: Capital Adequacy (Basel I, II, III and capital adequacy (Basel…
Aus Cap: Capital Adequacy
Bank Capital Adequacy
Function of bank capital
Expected losses
Unexpected losses
see the example of interest rate calculation
Basel I, II, III and capital adequacy
Basel I (1988)
Credit Risk
Market Risk
Basel II
(+) Operational Risk
(+) Other Risk
Basel III
New Capital Ratio
Common Equity Tier 1 - Quality (4.5%) if breached, no dividends and bonus!!
Higher Tier 1 (4-6%)
Conservation Buffer (2.5% additional capital)
Contra cyclical buffer (2.5% additional capital) (when in boom, prevent banks to lend more).
Leverage Ratio (at least 3%)
Liquidity coverage ratio (hold sufficient liquid assets to cover deposit outflow of 30 days worth; must exceed 100%)
enhanced risk coverage
Systematically important banks --> additional cap req for G-SIB (1-3.5%) and D-SIB (1%)
Net stable funding ratio (proportion of LT stable funding in 1 year; must exceed 100%)
Basel III Weakness: internal model used to asses credit risk varied too much
Pillar 1
Credit Risk
methods to address cr. risk weighting
Standardised Approach (SA) --> for small banks; think of credit rating
Foundation Internal Rating Based Approach (FIRB)
Advanced Internal Based Rating Approach (AIRB)
Market Risk
Losses might come from price movements
Equity Risk
Commodity Risk
I/R risk
Forex Risk
Operational Risk
losses might come from internal
Basic Indicator Approach
Standardised Approach
Advanced Measurement Aproach
Pillar 2
Supervisory Review Process
Response by supervisor
Modify its models
Reduce its risk taking
Increase its capital
Pillar 3
Market Discipline
Requires banks to disclose more info about their risk taking and risk management
Basel IV (not yet implemented)
Objectives
Financial Stability
Transparency
Comparability
Risk Sensitivity
Simplicity