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Basel ("BIS ratio or Basel I) (Basel II (expand in (number of risk…
Basel
"BIS ratio or Basel I)
banks in all participating nations must have a minimum capital Adequacy ratio of total capital to sum of risk weighted assets of 8%
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Risk weights
higher the degree of default risk, the higher the weights
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1996 market risk amendment to the Basel agreement s capital requirements for risks in banks trading accoutset the min
cap requirements for large banks that have substantial trading business adjusted to incorporate general market risk
cap requirements are based on bank's own assessment of risk when applying at VAR and generally complemented by stress testing
Basel II
recognition that Basel I no longer adequate for current banking environment in particular becuase it doesn't require banks hold capital against risks such as operational risk
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key areas: identification, quantification and management of risk, Basel II asims to relate cap requirement not only to the amount of risk that banks undertake, but how well they manage that risk
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3 pillar structure
Pillar 2
deals with other risks not covered under pillar 1, requires banks to hold capital to cover these risks and requires supervisors to review banks' capital planning
Pillar 3
requires a bank to enhance its public disclosures on its risk profile, capital adequacy and key financial info
Pillar 1
sets out minimum requirement for a bank's credit, market and operational risks
implementation issues
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US had only partially implemented as crisis unfolded, so transition is incomplete
Basel III
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response to GFC
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targets increased overall but specifically minimum core equity ,ore than doubled, additional capital for SIFIs Counter cyclical buffer
New liquidity policy
liquidity coverage ratio
would require banks to hold a sufficient amount of high quality liquid assets to survive a severe stress for a period of 30 days, outflows can only be met by generating liquidity from high quality government bonds and central bank deposits
net stable funding ratio
measures stable funding relative to the liquidity of the assets funded, and the potential draw on off-balance sheet commitments over a one year period
issues
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significant impact of Basel rules on entire sectors such as trade finance, project finance and securitization
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