Chapter 2: International Risk Regulation Flashcards
what is the role of the BIS?
Bank for International Settlements serves as a bank for central banks, and fosters international monetary and financial cooperation
what is the nature of regulatory guidelines produced by the BIS?
do not have any force in national or international law, and countries around the world that choose to implement them do so by making changes to their own legal and regulatory processes
why does the BCBS exist ?
Basel Committee on banking supervision. exists in order to enhance understanding of supervisory issues and improve the quality of banking supervision worldwide – a sort of ‘regulators’
regulator’.
what does the BCBS establish?
establishes standards on capital adequacy to ensure that banks have sufficient reserves to withstand specific levels of risk. also establishes a set of core principles to which national regulators are expected to adhere in their interaction with financial services firms in their jurisdictions
what three pillars are capital adequcy requirements groups into?
- calculation of the minimum level of capital which a firm should hold.
- enables the firm itself to offer its own view of the level of capital it should hold
- public disclosure of certain prescribed aspects of the firm’s capital and approach to risk management
what does the Basel accord stipulate?
stipulates the minimum capital ratios that should be maintained by banks in member countries
how does the basel committee seek to achieve its aims?
by setting minimum standards for the regulation and supervision of banks; by sharing supervisory issues, approaches and techniques to promote common understanding and to improve cross-border cooperation
what are the preconditions that the Basel committee sets out?
- Sound and sustainable macroeconomic
- well-established framework for financial stability policy
- well-developed public infrastructure
- clear framework for financial crisis management,
- Mechanisms for providing an appropriate level of systemic protection
- Effective market discipline.
what is the point of the 29 core principles for Effective Banking Supervision?
de facto global standard for sound regulation and supervision of banks
what do the different sections of the 29 core principles cover?
1–13 address supervisory powers, responsibilities and functions
14–29 cover supervisory expectations of banks
what does pillar 1 of the basel accord involve?
applying ‘formulaic’ methods for calculating the regulatory capital.
what can the basic Pillar 1 capital requirement for banks can be expressed as
capital/ credit risk + market risk + operational risk >8%
what does pillar 2 of the basel accord involve?
firms submitting information, enable the regulator to assess the amount of capital that should be held
what is the extra information in pillar 2 concerned with?
- risks not covered under Pillar 1
- way that risk is managed
- quality of the controls’ infrastructure
- way in which the calculated risk profile relates to the strategic and financial plans of the firm
what does pillar 3 require firms to do?
to publish information about the way they manage the risks they face.
what is the purpose of the sound principle documents published by the Basel Committee?
guidance on different aspects of risk management. include all the main risk areas
what does the formalised process for meeting pillar 2 of the Basel Accord require firms to do?
- assess its risks mitigants
- subject the results to rigorous stress testing
- determine an appropriate level of capital and liquidity for their risks
what are the key elements of the Internal Capital and Liquidity Assessment Framework?
The Firm’s Risk Exposure, Firm’s View on the Adequacy of its Risk Management Processes, Firm’s Financial and Capital Plans, Stress and Scenario Tests, Use Test, and the final setting of the capital and liquidity level
what does the capital and dividend plan need to be compared to ?
the aggregated results of the various separate risk assessments to make sure that they’re in line with each other
what is the benefit of the internal capital and liquidity assessment process becomes more widely adopted within a firm?
more diligence in their inclusion of risk factors earlier in the new business design process, risk taken more seriously by senior managers
What does , the Basel Concordat on Cross-Border Banking Supervision provide?
a framework for multi-jurisdiction supervision, focus on international banks’ solvency, liquidity and fx positions.
what is the man home principle?
that parent banks and parent supervisory authorities should monitor the risk exposure of the banks or banking groups for which they are responsible
what does the concordat on Cross-Border Banking Supervision set out?
certain principles which the Basel Committee
believes should govern the supervision of banks’ foreign establishments by parent and host authorities
what are the principles set out by the Cross-Border Banking Supervision concordat?
- All international banks should be supervised by a home country authority
- The creation of a cross-border banking establishment should receive the prior consent of host country and the home country authority.
- Home country authorities should possess the right to gather information from cross-border
banking establishments. - If the host country authority determines that any of these three standards is not being met, it could impose restrictive measures
