🛍Seek to measure the minimum loss on given asset or portfolio over a given time period at a given confidence level either 95 percent, 97.5 percent or 99 percent.

🛍VAR is particularly powerful in assessing the risk exposure of a portfolio of assets because it takes into account the correlation among different assets.

🌻 It can be found in virtually all types of credit analysis, from consumer credit to commercial loans.
🌻 The idea is to pre-identify certain key factors that determine and probability

1. CREDIT DEFAULT OPTION (CDO)
   👕 A CDO is an option to buy protection or sell protection as a credit default swap on a specific reference credit with specific maturity.
   👕The option is usually European, exercisable only at one date in a future at a specific strike price defined as a coupon on the credit default swap.
   👕CDOs on single credits are extinguished upon default without any cash flow, other than the upfront premium paid by the buyer of the option.
   
   

2.CREDIT DEFAULT SWAP (CDS)
👕A CDS is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default.
👕In the event of default the buyer of the CDS receives compensation usually at the face value of the loan and the seller of the CDS takes possession of the defaulted loan.
👕Anyone can purchase CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan and are called naked CDSs.

3. CREDIT FORWARD AGREEMENT (CFA)
   👕It is a CFA that hedges against an increase in default risk on a loan or decline in credit quality of a borrower after the loan rate is determined and the loan has been issued.
   👕The CFA specifies a credit spread. Example:A risk premium above the risk-free rate to compensate for default risk on a benchmark bond issued by the borrower.
   
   

4.CREDIT SECURITIZATIONS
👕Refers to the complex process of transforming individual loans into assets that may be purchased by investors.
👕Banks coordinate these transactions to reduce their exposure to individual financial risks.
👕Investors prefer securitized products as means to diversify their respective portfolios and gain entry into multiple financial markets.
👕There has been an explosive growth in the use of credit derivatives in recent years.
👕Market participants estimate that the world market in credit derivatives is doubling in size each year.

🌼 Banking crises, rapid structural change, and the continuing globalization, liberalization, and integration of international banking have led national and multilateral policy makers to focus incrased attention on the crucial role of banking supervision and regulation.

🌼 Policy discussions specifically focus on several issues that must be addressed in establishing and maintaining effective supervision, including who should supervise, monitor, and control banks i.e. the framework or structure of bank supervision

🌼 Three issues for policy makers to address with respect to the structure of bank supervision are:

 🍃 whether there should be a single bank supervisory authority, or multiple bank supervisors 
 🍃 whether  the central bank should play a role in a bank supervision
 🍃 whether the supervisor responsible for the banking industry should also have responsibility for other financial services, in particular the securities and insurance industries.

🌼 How these issues are addressed is important because policies that fail to provide for an appropriate bank supervisory framework may undermine bank performance and even lead to full-scale banking crises.

🔑 A key policy decision in designing the framework or structure of the bank supervisory system is whether there should be a single bank supervisory authority or multiple bank supervisors.

🔑 Although the previous conceptual literature covers a number of possible advantages and disadvantages to each option, perhaps the strongest reason for some to advocate a single bank supervisory authority is the fear of a competition in laxity between multiple bank supervisors, while those who favour a system with two or more bank supervisors stress the benefits of a competition in ideas among multiple bank supervisors.

✨ Countries must also decide whether to assign responsibility for bank supervision to the central bank.

🌸 Much of the discussion about MNCs doing consolidating financial services supervision takes as its starting point the observation that these kind of companies are growing increasingly complex.

✨ As with the issue of single or multiple bank supervisors, the conceptual literature is split on the relative advantages and disadvantages of the central bank being a bank supervisor.

✨ Perhaps the most strongly emphasized argument in favour of assigning supervisory responsibility to the central bank is that as a bank supervisor, the central bank will have first-hand knowledge of the condition and performance of banks.

✨ This in turn can help it identify and respond to the emergence of a systematic problem in a timely manner.

✨ Those pointing to the disadvantages of assigning bank supervision to the central bank stress the inherent conflict of interest between supervisory responsibilities and responsibility for monetary policy.

✨ The conflict could become particularly critical during an economic recession, in that the central bank may be drawn to pursue a too-loose monetary policy to avoid adverse effects on bank earnings and credit quality, and/or encourage banks to extend credit more liberally than warranted based on credit quality conditions to complement an expansionary monetary policy.

🌸 Financial conglomerates that operate in the banking, securities, and insurance sectors are among the most powerful MNCs in many countries.

🌸 Some have argued that a supervisor with broad scope to cover all financial services is necessary to supervise such entities effectively and in particular to insure that supervisory oversight of risk management by such conglomerates is not fragmented, uncoordinated or incomplete.

🌸 The most significant argument against a supervisory authority with broad scope is that it would result in an undue concentration of power that would otherwise be dispersed among several agencies.

🌸 This could increase the likelihood of regulatory capture and retard financial innovation.

💥 BCBS is a commitee of banking supervisory authorities that was established by the central bank governors of the group of ten countries in 1974

💥 Objective is to improve understanding of fundamental supervisory aspects and increase the quality of banking supervision worldwide

💥 BCBS frames guidelines and standards in different areas. Some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision

💥 Committee members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the UK and the US

💥 The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. However, the BIS and the Basel Committee remain two distinct entities.

💥 BCBS formulates comprehensive supervisory standards and guideline and recommends statements of best practice in banking supervision (see bank regulation under Basel III Accord) in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems

💥 Basel III is a comprehensive set of reform measures developed by the BCBS in order to strengthen the regulation, supervision and risk management of the banking and financial sector

: 🎉 Emerged in the 1960s and 1970s as a response to distortionary regulations in developed economies

🎉 Such measures included interest rate ceilings, restrictions on the range of products supervised financial institutions could offer, capital controls and high effective tax rates

🎉 OFCs exist in large part because they offer financial market participants tax, regulatory and supervisory advantages not available in their home markets

🎉 Futhermore, the nature of financial activities in OFCs highlights many of the challenges internationally cooperative supervisory groups face in encouraging transparency and disclosure

🎉 Offshore finance is the provision of financial services by banks and other entities to non-residents

• Financial systems with external assets and liabilities out of proportion to domestic

• Financial intermediation

• Relatively large numbers of financial institutions engaged primarily in business with non-residents

• Provision of some or all of the following services including low or zero taxation, moderate or light financial regulation, banking secrecy and anonymity

🔥 The WTO General Agreement on Trade in Services (GATS) and its Annex on Financial Services (ANNEX) took effect in 1999, specify the general principles that govern cross-border trade in financial services

🔥 The GATS and the ANNEX also specify the restrictions that may be imposed on trade in services for prudential purposes by the current 161 WTO member countries

🔥 The important point for their purposes is, a country may implement regulatory measures in contravention of its GATS obligations and commitments so long as they are taken for prudential reasons

🔥 This is so-called prudential carve-out, however, cannot be used as a means to avoid a member country's obligations and commitments

🔥 The difference between a prudential and a protective measure, both of which restrict trade in financial services, may be difficult to determine because the ANNEX and the GATS itself do not provide any specific guidance regarding the sscope and extent of the prudential exception

🔥 The GATS even prohibits member countries from listing prudential restrictions in their schedules of commitments

🔥 Member countries retain the discretion to invoke prudential regulations to restrict cross-border trade in financial services (despite any commitments) at any time so long as the measures are taken for prudential reasons