Course Details
Course Outline
5 days course
Understanding The Role Of Regulatory Bank Capital
- Overview of financial statements of banks – accounting principles
- Composition of the balance sheet – types of assets and liabilities
- Understanding the key elements of the P&L – statement of income
- Review of the distinction between the banking book and the trading book
- The equity capital of financial Institutions
- Illustration of the contrast between liquidity and solvency issues
- Distinguish between going concern and gone concern capital
- Explanation of bail-in able capital
- Accounting and regulatory definitions for own funds
- Prudential filters and revaluation reserves, AOCI
- Treatment of goodwill, intangibles, deferred tax assets
- Treatment of securitizations and off-balance sheet exposures
Requirements for Qualifying Capital under Basel III
- Definitions of Regulatory Capital – Core Tier 1, Tier 2
- Core Tier 1 – equity capital and disclosed reserves
- Supplementary Capital – Tier 2 – subject to the discretion of supervisor/central bank
- Revaluation reserves – limitations
- Hybrid capital – equity-like e.g. perpetual preferred shares
- Subordinated debt instruments – criteria and restrictions
- Short-term subordinated debt covering market risk (Tier 3)
- Loss of absorbency requirements
- Deductions from the capital – goodwill and subsidiaries
- Supervisory discretion over cross-holdings of other banks
Basel Treatment of Market Risk
- Value at Risk (VaR) – rationale, theory and methods of calculation
- Limitations of parametric VaR
- What about tail risk – does VaR capture this adequately?
- Risk weightings for market risk
- Standardized approach
- Interest rate risk in both the trading book and banking book
- Overview of Internal Models Approach (IMA)
- Impact of market risk on instruments in the trading book
- Volatility and market stress
- Incremental Risk Charge
- Off-Balance Sheet items
Operational Risk under Basel
- Definition of Operational Risk introduced into the Basel II framework
- The life cycle of Operational Risk
- Basel measurement approaches:
- - Basic Indicator
- - Standard Approach
- - Advanced Measurement Approaches
- Risk weightings under each approach
- Rogue trading – the severity of losses
- Scenario generation – KRI’s, management involvement in adverse scenario modeling
- Quantifying the exposure and severity of “outliers” and tail risk
- Loss Distribution Approach (LDA) and Scenario Based Analysis (SBA)
- Application of VaR techniques to operational risk (Op VaR)
- Loss identification – measurement, management, monitoring, reporting
- Integrating operational risk management into the organizational risk management framework
Alternatives to using external credit ratings
- Developing internal scoring models for assessing corporate loan exposures
- The contrast of developed and emerging economy approaches to credit risk assessment
Credit Concentration Risk and Large Exposures
- Concentration risk – not adequately captured under the Pillar One approaches
- A brief summary of the Supervisory Review and Evaluation Process (SREP)
- Treatment of Concentration Risk within the Pillar II ICAAP framework
- Identifying sectoral concentration risk – general principles
- Quantifying concentration risk in GCC
Modelling and Stress Testing
- Explanation of the techniques for conducting stress tests
- Backtesting using historical returns
- Scenario generation – stress testing using hypothetical returns
- Sizes of historical samples – are they sufficiently large to include a wide variety of conditions?
- The danger of optimizing risk management parameters – over-fitting to the historical data
- Modeling methods – contingency scenarios
- Limitations of the normal distribution as the basis for probabilistic modeling
Drivers of Counter-party Risk (CCR)
- Separating market risk impact on trading positions from CCR
- Pricing counterparty risk – use of spreads, ratings
- Probability of Default (PD) – estimation of PD and Exposure at Default (EAD)
- Expected positive exposure (EPE)
- Loss Given Default (LGD) and recovery rates
- Counterparty risk in credit default swaps
- Counterparty risk in interest rate swaps
- Experience of AIG and mono-lines insurance companies in financial crisis
- The role of a central clearing house
- Stress analysis and randomized stress scenarios
- Market factors which drive counter-party credit deterioration
Credit Value Adjustment (CVA) and collateral
- Definition Credit value adjustment (CVA)
- Defining credit exposure in relation to market risk impact on derivatives
- Expected positive exposure and worst-case exposure
- Nature of collateralization – ISDA treatment
- Benefits of effective collateral management
- Impact of netting on CVA
- Impact of collateral on CVA
- Hedging and credit default swaps
- Eligible hedging instruments
- Bilateral counterparty risk and collateral
- Over-collateralized positions and risk of counterparty default
Liquidity Coverage Ratio (LCR)
- Explanation of Liquidity Coverage Ratio (LCR)
- Criteria for inclusion as High-Quality Liquid Assets (HQLA)
- Categories of HQLA – Level 1, Levels 2A and 2B
- 30 day stressed market outflows
- Runoff rates
- Net Stable Funding Ratio (NSFR)
- Explanation of available funding (ASF) versus required funding (RSF)
- Weighting factors for ASF and RSF
Impact of Basel III on the Business Model of Banking
- Impact of the Basel III LCR on balance sheet exposures to non HQLA assets
- Hoarding of Level 1 HQLA assets
- Unintended consequences for macro liquidity from Basel III regulations
- Linkage of sovereign and domestic banking credit quality
- Decreased inventories of corporate bonds being held by primary dealers
- Requirements for unrealized losses with AFS securities to be deducted from CET1
- Explanation of Contingent Capital instruments (CoCo’s)
- Role of CoCo’s as a contributor to AT1 for capital adequacy purposes
- A brief history of CoCo’s an inability to see the consequences from conversion
- Sovereign wealth fund exposure to CoCo’s – elevated liquidations of SWF assets
- Possible suspensions/reductions of coupon payments of CoCo’s
- Collateral netting across CCP’s
- Shortage of collateral – implications, the effect on the bank’s ROE
- Impact of TLAC on G-SIB banks
Implementation and Reporting Systems for Basel Compliance
- Efficacy of the monitoring and reporting mechanisms within banks and how they interface with overall risk management
- Avoiding silos
- Accounting, surveillance, IT systems and data storage back-up systems
- Monitoring of controls – quality and integrity of the procedures
- Development of contingency scenarios
- Role of the Chief Risk Officer
- Role of the Internal Auditor
- Developing dashboards for KRI’s for credit, market, and operational risk
