Solvency (8) Flashcards
How can we classify BANKING RISKS?
ORGANIZATIONAL RISKS: strategic, technological, competition, regulatory, fraud, operational…
TYPICAL BANKING RISKS
- credit risk (breach of obligations)
- liquidity risk (credit request, deposit withdrawal)
- IR risk
- ER risk
- market risk (P volatility)
- market + liquidity risk (dry markets when we want to sell)
What is the BASEL COMMITTEE?
The Basel Committee is an organisation founded in 1975. It is not a formal supranational supervisory body, and its conclusions have no legal weight.
Its activity is limited to devising standards and recommendations on supervision and good banking practice, with the intention that individual authorities implement them.
What are the AIMS of BASEL I?
- fill loopholes in international supervision
- convergence of supervisory standards (harmonisation)
two main principles
- no banking establishment must scape supervision
- supervision must be appropriate
What’s the EVOLUTION of BASEL I?
KEY ROLE
- 1988
“Basic Principles for Effective Banking Supervisions”
“The Basel K Accord” - solvency ratio >= 8%
- 2004
New Basel II Accord - much thorough framework - 2009
consultative docs: “Strengthening the resilience of the banking sector”, “International framework for liquidity risk measurement, standards and monitoring”
What does the level of solvency affect?
- Bank’s freedom to operate as it wishes (growth and results)
- The risk premium that entities have to pay to obtain interbank financing or by Fixed Y securities
K (equity) is a strategic variable.
PROFITABILITY – SOLVENCY
an excess of OR can diminish profitability. Profitability on OR consumed is the best standard for management control.
How to improve solvency ratios?
- issues preference shares
- issue subordinated debt
these issues improve the ratio in absolute terms although they worsen it with respect to it quality by the increase of its relative weight in the ratio
key objectives of BASEL II
much thorough framework…
1. promote security and health of the financial system
- promote fair competition
- define min k requirements based on more risk-sensitive criteria
- improve banking efficiency and supervision
- transparency of information
1st cornerstone of BASEL II - min K req
Contemplates new approaches that are more risk-sensitive.
K req for Credit risk…
- Standard approach
extension of Basel I, better measurement of credit risk
- Internal Rating Based (IRB)
assessment of debtors via models of risk measurement and management developed internally by banks
(Basic // Advanced (no values set by supervisory body))
k req for Operational risk…
- Basic Indicator Method (k req = average gross revenue x 0.15)
- Standard Method (8 lines of business, req calculated for each)
- Advanced Method (banks use their own approaches previously approved by supervisors)
2nd cornerstone of BASEL II
refers to the role of supervision to evaluate global risks of financial intermediaries via CBs
3rd cornerstone of BASEL II
places emphasis on market discipline…
- greater transparency of information
- allowing effective monitoring of solvency and bank capitalisation
BASEL II in a nutshell
The agreement covers banks that are internationally active. Europe decided to implement the accord in all banks, international or not.
MACRO - solvent system that contributes to the countries economic development
MICRO - will allow those banks who stayed in BASEL I not to lose competitivity
What is BASEL III?
The crisis exposed that K had no sufficient quality, banks had to rebuild their K bases.
- need for major support from governments
- deepening economic recession
BASEL III = comprehensive set of reforms to strengthen regulation / supervision / risk management
- improve the capacity to absorb economic disruptions
- improve risk management and governance
- strengthen transparency and information sharing
complementary approaches:
micro level - increased resilience of individual banks
macro level - monitoring of risks
How does BASEL III organise regulation?
two types of entities:
- All banks
- SIFIs (Systematically Important Financial Institutions; shall have greater capacity to absorb losses)
- -> Capital (Pillar 1 // Pillar 2 // Pillar 3)
- -> Liquidity
What are the SIFIs?
Systematically important financial institutions
They must have greater capacity to absorb losses, the Committee developed a methodology for quantitative indicators and qualitative elements that allow for the identification of SIB
- issued advisory paper for cooperation with FSB
What is the EU-wide stress test? 2018
it provides supervisors, banks and other market participants with a COMMON ANALYTICAL FRAMEWORK to consistently compare and assess the resilience of EU banks to adverse market developments and shocks.
- common methodology and microeconomic baseline
- identify systematic risks
- hypothetical scenario (48 banks in 15 EU countries)
