Solvency Flashcards
What are the different types of baking risk?
Credit, liquidity, interest rate, exchange rate, market and market, and liquidity risk. Also, organizational risk.
What is the Basel Capital Accord (Basel I)?
Banking entities should maintain at all times a solvency ratio above 8%
What is the solvency ratio?
It is equity divided by the sum of asset balance sheet items plus some of the balance, weighted using an approximate measure f their level of risk.
What can we classify the capital (equity) in?
Tier 1 (common share and reserves), Additional Tier 1 (CoCos), and Tier 2 (revaluation of reserves and no-voting shares).
How can solvency increase?
With own resources, but high own resources could be low profitability. So there must be a balance between them
What is Basel II?
It is used by globally active banks and involves 3 cornerstones: minimum capital requirements, supervision to evaluate global risk of financial intermediaries and market discipline
How can the minimum capital requierements of the Basel II be calculated?
You can calcute for credit risk thrugh the standard approach or Internal Rating Based (calcuate probability of breach on obligation). The you calculate the operational risk (basic- CR = average gross revenue of last 3 years, standard - CR for each line of business, and advanced method-own approaches)
What is Basel III?
A regulatory tool introduced after the global crisis in order to strenghten the regulation, supervision and risk management of the banking sector.
What is the Basel III composed by?
It is focused on quantity and quality of capital, for which wer have pillar one (capital, risk coverage and containing leverage), pillar 2 (risk management and supervision) and pillar 3 (market discipline). Then with have liquidity.
How is the liquidity requirements in basel III calculated?
With the liquidity coverge ratio, which require banks to have enough quality liquidity assets to withstand 30 days in a stress scenario
What is SIFIs?
Systematically Important Financial Institutions, they must have greater capacity to absorb losses as they pose a greater risk to the financial system.
