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2018 | Buch

Introductory Remarks Kapitel lesen Erstes Kapitel lesen

Final Basel III Modelling

Implementation, Impact and Implications

verfasst von: Dr. Ioannis Akkizidis, Lampros Kalyvas

Verlag: Springer International Publishing

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book provides a concise and practical guidance on the implementation analysis of the new revised standards of the Basel Committee on Banking Supervision (BCBS) on the supervision of the international banking system. Based on publicly available data on default rates and realised loss-given-default rates, it provides an analysis of credit and market risk, assessing the extent to which the new framework on risk-based and leverage ratio requirements affects the modelling of banking risks. Moreover, it provides a detailed analysis of the Fundamental Review of the Trading Book (FRTB), which changes the philosophy for the risk valuation and capital requirements of the market risk, and of the latest developments on the credit valuation adjustments (CVA) framework. It also examines the impact of the final calibration of operational risk parameters on the level of capital requirements.

It provides an overview of the modelling properties that govern the application of the internal models for credit and market risk, and provides evidence on the overall impact on banks’ cost of funding due to the implementation of Basel reforms as shaped in December 2017. Finally, the book provides practical examples and hands-on applications for assessing the new BCBS framework.

Inhaltsverzeichnis

Frontmatter
1. Introductory Remarks
Abstract
Before they became standards on Thursday, 7 December 2017, the proposals (BCBS, 2015a, 2015b, 2016a, 2016b, 2016c) of the Basel Committee on Banking Supervision (BCBS) had spurred a heated debate amongst regulators, banks, and politicians on the merits that the new supervisory standards would bring to the resilience of banks as opposed to the potential burden that they would bring to the operational cost and the cost of capital. Since they became standards, the Basel reforms pose challenges as to the implementation of the new rules that the international banks have to cope with.
Ioannis Akkizidis, Lampros Kalyvas
2. The Roadmap to the Final Basel III
Abstract
The current chapter describes the international bodies and the interaction amongst them that leads to the development of international banking supervision standards. It also depicts the market or regulatory failures that contributed to the creation of new supervisory standards and the significant changes that flagged each reform. In particular, it describes the evolution of banking standards from the Basel Capital Accord (aka Basel I) to Basel III.
Also, it elaborates on the final Basel III amendments on each of the risk categories (credit, market/credit valuation adjustments, and operational risk) compared to Basel III, in an attempt to assess the direction of the impact of such changes. Finally, it briefly presents the changes in the leverage ratio framework.
Ioannis Akkizidis, Lampros Kalyvas
3. Impact Assessment Methodology
Abstract
The current chapter describes the formulae that quantify the impact of the transition from the current to the final Basel III framework. First, it presents the core regulatory ratios that banks need to comply with their minimum capital requirements, that is, the risk-based capital ratio and the leverage ratio. Then, it presents the typology for assessing the impact of the implementation of the final Basel III framework, at the level of the minimum required capital. It also suggests the formulation for the evaluation of the capital shortfall that the new framework implies, assuming that the current actual regulatory capital is entirely assigned to Pillar I capital requirements.
Ioannis Akkizidis, Lampros Kalyvas
4. Credit Risk: Aspects of Implementation
Abstract
The impact of the credit risk-related changes on the total RWA and capital requirements is important primarily due to the share of the current share of credit risk to the total RWA and capital requirements (almost two-thirds of the total minimum required regulatory capital of the major international banks [BCBS, Basel III: Finalising post-crisis reforms—Standards, 2017]).
The scope of this chapter is to provide the reader with the necessary background for the evaluation of the current and final Basel III. The comparison between the current and revised frameworks focuses on the assessment of the migration from the current to revised SA and from the current to the revised IRBA. Also, it aims at discussing the properties of such horizontal migration and introduces the reader to the properties of credit risk modelling.
Ioannis Akkizidis, Lampros Kalyvas
5. Credit Risk: Quantitative Impact
Abstract
The new credit risk specifications include, inter alia, the implementation of higher floors for the PD, LGD, and EAD in the IRBA models, which allow banks to estimate these parameters internally. It also requires the migration of certain exposures from the AIRBA to the FIRBA and SA. However, the utmost goal of the Basel reform package is the reduction of the variability of RWAs across time. These revisions target the reduction of the variability of RWAs across time, and implicitly amongst banks with similar portfolio risk profiles. The current chapter examines the quantitative impact of the structural changes that Basel introduces in the calculation of capital requirements under the FIRBA and AIRBA.
Ioannis Akkizidis, Lampros Kalyvas
6. Market Risk: Fundamental Review of the Trading Book (FRTB)
Abstract
The trading book consists of actively traded positions which are facing financial losses due to the fluctuation of the underlying market risk factors. Since the latest market risk framework did not adequately capture the severity of such losses, the BCBS proposed a new framework for the estimation of the minimum capital requirements for market risk, also known as the Fundamental Review of the Trading Book (FRTB) framework (BCBS, Fundamental Review of the Trading Book: A revised market risk framework, 2013; BCBS, 2016a).
The FRTB proposals revise the changes in the philosophy for the valuation of market risk under both the standardised approach (SA) and the internal model approach (IMA). The new framework considers market liquidity risk under both approaches, whereas under the advanced IMA it introduces the estimation of the expected shortfall (ES) substituting the value at risk (VaR) as a measure for the assessment of market risk.
Ioannis Akkizidis, Lampros Kalyvas
7. Credit Valuation Adjustments
Abstract
The derivative positions are subject to changes due to market volatility which changes the exposure to counterparty risk and the credit quality of the counterparty. Against this background, banks should keep aside additional capital, known as credit valuation adjustments (CVAs) capital charge, which stands for the difference between the risk-free and actual portfolio values which takes into account the default probability of a counterparty.
The CVA analysis is a critical element in pricing OTC derivatives. Since the changes in CVA are due to the market pricing of counterparty risk, the variability of the counterparty risk over time could be potentially more significant than the credit risk of the underlying position. Hence, the fair value of a financial derivative depends on the counterparty credit risk of the traded derivative.
Ioannis Akkizidis, Lampros Kalyvas
8. Revisions to Operational Risk
Abstract
Chapter 8 describes the current operational risk framework, the final specifications of the proposed standardised measurement approach (SMA) for its estimation under the final Basel III (BCBS, Basel III: Finalising post-crisis reforms—Standards, 2017), and their comparison with the initial proposals for the SMA (BCBS, 2016b).
Within the description of SMA methodology, Chap. 8 compares the core SMA proposals with the alternative specifications proposed by the authors. Also, the chapter presents the interaction between the business indicator component and the internal loss multiplier and infers the sensitivity of how banks’ operational risk requirements are affected by the new framework.
Ioannis Akkizidis, Lampros Kalyvas
9. Output Floor, Leverage Ratio, and Other Regulatory Requirements
Abstract
The newly proposed banking supervision standards have triggered ambiguity amongst banks and supervisors (Economist, Polishing the floor: Supervisors put off finalising reforms to bank-capital rules—Disagreement over revisions to Basel 3 cause delay, 2017) as is always the case before the finalisation of the Basel framework (see also Economist, A twist or two of Basel: Europe and America cannot agree on new global banking rules, 2007, for the debate on Basel II/III). Supervisors from certain jurisdictions echoed that the internal models produce risk weight (RW) which are unjustifiably lower than the SA-equivalent RW and thus lead to less capital which could place financial stability at stake.
Also, the current chapter discusses the final Basel III amendments on leverage ratio framework without, however, providing evidence on the direction of a potential impact. Finally, the existing chapter refers to the residual impact of other Basel regulatory reforms (TLAC) and how banks could approximate the assessment of the holistic impact of all reforms on RWA, capital requirements, and the cost of funding.
Ioannis Akkizidis, Lampros Kalyvas
Backmatter
Metadaten
Titel
Final Basel III Modelling
verfasst von
Dr. Ioannis Akkizidis
Lampros Kalyvas
Copyright-Jahr
2018
Electronic ISBN
978-3-319-70425-8
Print ISBN
978-3-319-70424-1
DOI
https://doi.org/10.1007/978-3-319-70425-8