Week 4 Banking part 1 Flashcards
World wide supervision
Bank for international settlements (BIS)
Promotes discussion between central banks
Prime counterparty for central bank transactions
Financial stability board (FSB)
Monitors and Makes recommendations about the global financial system
Monitors and advises on market and systematic developments
Europeas supervision
European banking authority (EBA)
-maintain financial stability, safeguard the integrity, efficiency and orderly functioning of the European banking sector
ESMA
Stability of EU banking sector by protecting investors and promoting stable and orderly financial markets
EIOPA
Protecting customers and building trust in financial system
Ensure a high level of regulation and supervision
Greater harmonisation
European Central Bank (ECB)
Safeguard value of euro
SRB
resolution authority
National supervision
DNB
Independent central bank,supervisor and resolution authority together with European partners
- Price stability and balanced macro development in eu
- Shock proof financial system
- reliable and efficient payment traffic
- solid, integral and settleable financial institutions that fulfill obligations and commitments
The financial markets authority (AFM)
Oversees the financial markets : saving investing,insuring, lending
Drivers of regulations and supervision
Guidance IASB FSB BIS EU
Reg and supervision EBA SRB ESMA AFM DNB ECB
From Basel 1 to Basel 2
Basel 1
Bank assets assigned to one of five risk weights or baskets (0-100%)(eg corporate lending 100%, residential mortgages 50%)
Capital = 8% of RWA
Late 90s limitations recognised
- possible to place all loans in same risk weight basket irrespective of counterparty creditworthiness
- doesn’t encourage risk mitigation techniques
- emergence of new products and regional crises made it necessary to intitiate capital standards
Basel 2 2007
- The higher the risk the higher the capital requirement
- bank assets assigned to one of 5 risk baskets and capital 8% of RWA
- align regulatory capital to underlying risk the bank faces (credit,market or operational )
- makes capital more risk sensitive
- encourages institutions to improve their risk management and incorporate off balance sheet risks
Basel 2 pillars
1 minimum capital requirements
Credit risk -standardised
Market risk
Operational risk
Road to Basel 3
Basel 2 failures
Basel 3 features and drivers
Basel 2 failures Low level and quality of banks capital bases Excessive on and off BS leverage Insufficient liquidity buffers Systematic risk not captured Focus on revenue not mitigating risk
Main Basel 3 features RaisinG Quality and quantity of capital Introduction of overall leverage ratio Intro of global liquidity risk standards Addressed systematic risk
Basel 3 drivers Capital adequacy ratio Leverage ratio LCR NSFR
Basel 3 capital
CET 1- core capital, common stock and retained earnings may also include non redeemable non cumulative stock
Tier 2 supplementary capital - revaluation reserves,undisclosed reserves, hybrid instruments and subordinated term debt
Tier 3 capital held to meet market risks- subordinated issues, undisclosed reserves and general loss reserves
Basel 3 capital ratio
A) eligible capital - regulators demand high quality equity
B) risk weighted assets
C) capital ratio level
Capital ratio = eligible capital / risk weighted assets
If capital decreases and RWA increases then capital ratio increases
Basel 3 capital requirements
Common equity ratio more than or equal to 4.5%
Tier 1 capital more than or equal to 6%
Total capital ratio (pillar 1 ratio ). More than or equal to 8%
Basel 3 leverage ratio
Capital / exposures
must be more than or equal to 3%
Capital = tier 1 (high quality )
Exposures = total assets + off balance sheet items
Liquidity coverage ratio
Requirement for banks to hold sufficient high quality liquid assets to cover its total net cash outflows over 30 days
High quality liquid assets / total net liquidity outflows over 30 days
Must be greater than 100%
Net stable funding requirement
Aims to calculate proportion of long term assets which are funded by long term stable funding
Required funding = assets
Long term of structural term assets means:
- 100% of loans over 1 year
- 85% of loans to retail clients with a remaining life shorter than one year
- 50% of corporate loans with less than one year remaining
- 20% of government and corporate bonds
- off balance sheet categories
Stable funding = liabilities Long term : Customer deposits Long term deposits Equity
Excluded short term wholesale funding
Net stable funding ratio formula
Available amount of stable funding / required amount of stable funding
Must be equal to or greater than 100%
Promotes medium to long term funding - reduces incentives for short term wholesale funding and supplements LCR
“Stable funding “ - those types of equity and liabilities expected to be reliable sources of funds under and extended stress scenario of one year
USED TO ADRESS LIQUIDITY MISMATCHES
