Alternative Risk Management Standards Flashcards
When was Basel 2 introduced?
2004
When was Basel 3 introduced?
2017 with implementation timelines up till 2027.
What extra things did Basel 3 introduce?
- Extra focus on macroprudential issues - systemic risks that globally interconnected financial institutions may present.
- New capital requirements which address quality and quantity of eligible capital.
- Introduction of capital buffers above minimum levels to capture procyclical and systemic risk.
- Recognition of Global Systemically Important Banks (G-SIBs)
What is the criteria that Basel 3 uses to identify a G-SIB?
- Size
- Interconnectedness
- Lack of substitutability
- Global activity
- Complexity
What is the Bank Leverage Ratio forumla under Basel 3?
Capital Measure (Tier 1)/Exposure Measure (on and off balance sheet) * 100
What does the Bank Leverage Ratio indicate under Basel 3?
A higher bank leverage ratio would indicate that the bank has a higher amount of Tier 1 capital compared to its risk exposure. Higher the ratio, the more likely the bank is to survive a period of stress.
What are the 3 pillars of Basel 3?
Pillar 1 - Quantitative requirements - minimum capital requirements - credit risk, market risk, operational risk.
Pillar 2 - Governance Principles, Supervisory Review Process, ICAAP
Pillar 3 - Market Disclosure, Transparency and Discipline, Pillar 3 Annual Disclosure Report
When was Solvency 2 implemented?
2016
What are the 3 pillars of Solvency 2?
Pillar 1 - Quantitative requirements - minimum capital requirements- Insurance risk, Credit risk, Market risk, Liquidity risk, Operational risk
Pillar 2 - Governance Principles, Supervisory Review Process, Own Risk Self Assessment (ORSA)
Pillar 3 - Market disclosure and reporting, Solvency and Financial Condition Report (SFCR).
What is the point of Pillar 1 in Solvency 2?
Sets the quantitative requirements for the level of capital that an insurer is expected to hold - Solvency Capital Requirement (SCR).
It also sets the absolute minimum floor level requirement below which regulatory intervention will take place - Minimum Capital Requirement (MCR)
What is the point of Pillar 2 in Solvency 2?
Set the qualitative requirements including governance, supervisory review and ORSA. The risk management system that an insurer has must assess the risk it faces, manage them and identify how much capital is required to run the business.
What is the IAIS ComFrame?
An international standard for insurers that emulates the Solvency 2 requirements by setting global standards for risk based regulation.
What is the Dodd Frank Wall Street Reform?
Reform brought in the strengthen the US financial system to avoid using tax payer money to bail out banks deemed too big to fail.
Established the Financial Stability Oversight Council (FSOC) which makes recommendations to the Federal Reserve for implementing rules for capital, leverage, liquidity, risk management and other requirements.
It can increase the reserve requirements for banks and enforce these.
Established the Volcker Rule - limits banks for engaging in proprietary trading (own money trading) and only allows it for currency trading. It also prevents banks from owning hedge funds or private equity funds.
Sets requirements for banks to wind down in an orderly way.
Strengthened the Commodity Futures Trading Commission and SEC to regulate OTC derivatives to limit excessive risk taking.
Required central clearing and exchange trading for most derivatives with a view to improve transparency.
What did the Consumer Protection Act 2010 do?
Created the Consumer Financial Protection Bureau which has oversight of banks with more than $10 billion in assets and to all mortgage related businesses, payday lenders and other large non-bank firms.
