Basel regulatory capital formula revised

2021 ◽  
pp. 2142006
Author(s):  
Yimin Yang ◽  
Min Wu
Keyword(s):  
Additional Data ◽  
Capital Adequacy ◽  
Capital Requirement ◽  
Regulatory Capital ◽  
New Approach ◽  
Internal Rating ◽  
Loss Experience ◽  
As Stress ◽  
Risk Parameters ◽  
Asset Correlation

Credit capital requirement is a key component of Basel implementation to assess a bank’s capital adequacy. Under the Internal Rating-Based approach, some risk parameters, including Asset Correlation, are implicit assumptions that cannot be observed directly. While some heuristic formulae of Asset Correlation for different business segments are provided by Basel, they may not be fully consistent with each bank’s loss experience and thus may cause systematic underestimation of banks’ capital requirement. To address this issue, we derive an equivalent capital formula in such way that the unobservable Asset Correlation is replaced by an observable and well-understood parameter called Default Volatility, which can be calibrated based on banks’ historical loss experience. This new approach simplifies parameter estimation process without requiring additional data, as well as making risk analysis such as stress testing more credible.

scholarly journals Asset correlation, portfolio diversification and regulatory capital in the Basel Capital Accord

2011 ◽  
Vol 1 (3) ◽  
pp. 31-39 ◽  
Author(s):  
Sylvia Gottschalk
Keyword(s):  
Basel Ii ◽  
Capital Adequacy ◽  
Probability Of Default ◽  
Regulatory Capital ◽  
Kmv Model ◽  
High Quantiles ◽  
Portfolio Loss Distribution ◽  
Credit Portfolio ◽  
Portfolio Loss ◽  
Asset Correlation

In this paper, we analyze the properties of the KMV model of credit portfolio loss. This theoretical model constitutes the cornerstone of Basel II’s Internal Ratings Based(IRB) approach to regulatory capital. Our results show that this model tends to overestimate the probability of portfolio loss when the probability of default of a single firm and the firms’ asset correlations are low. On the contrary, probabilities of portfolio loss are underestimated when the probability of default of a single firm and asset correlations are high. Moreover, the relationship between asset correlation and probability of loan portfolio loss is only consistent at very high quantiles of the portfolio loss distribution. These are precisely those adopted by the Basel II Capital Accord for the calculations of capital adequacy provisions. So, although the counterintuitive properties of the KMV model do not extend to Basel II, they do restrict its generality as a model of credit portfolio loss.

scholarly journals Methodology and Models for Individuals’ Creditworthiness Management Using Digital Footprint Data and Machine Learning Methods

Mathematics ◽  
2021 ◽  
Vol 9 (15) ◽  
pp. 1820
Author(s):  
Ekaterina V. Orlova
Keyword(s):  
Interest Rates ◽  
Additional Data ◽  
Risk Level ◽  
Gradient Boosting ◽  
Cluster Number ◽  
New Approach ◽  
Credit Risks ◽  
Stochastic Gradient Boosting ◽  
The Stability ◽  
Digital Footprints

This research deals with the challenge of reducing banks’ credit risks associated with the insolvency of borrowing individuals. To solve this challenge, we propose a new approach, methodology and models for assessing individual creditworthiness, with additional data about borrowers’ digital footprints to implement comprehensive analysis and prediction of a borrower’s credit profile. We suggest a model for borrowers’ clustering based on the method of hierarchical clustering and the k-means method, which groups actual borrowers having similar creditworthiness and similar credit risks into homogeneous clusters. We also design the model for borrowers’ classification based on the stochastic gradient boosting (SGB) method, which reliably determines the cluster number and therefore the risk level for a new borrower. The developed models are the basis for decision making regarding the decision about lending value, interest rates and lending terms for each risk-homogeneous borrower’s group. The modified version of the methodology for assessing individual creditworthiness is presented, which is to reduce the credit risks and to increase the stability and profitability of financial organizations.

Regulatory capital requirement and bank stability in Sub-Saharan Africa

2021 ◽  
pp. 1-13
Author(s):  
Ibrahim Nandom Yakubu ◽  
Alhassan Bunyaminu
Keyword(s):  
Sub Saharan Africa ◽  
Capital Requirement ◽  
Regulatory Capital ◽  
Bank Stability ◽  
Sub Saharan

Benchmarking and crosschecking international banking economic and regulatory capital

2005 ◽  
Vol 13 (1) ◽  
pp. 65-79 ◽  
Author(s):  
John L. Simpson ◽  
John Evans
Keyword(s):  
Banking System ◽  
Performance Model ◽  
Capital Adequacy ◽  
Future Research ◽  
Informational Efficiency ◽  
International Banking ◽  
Regulatory Capital ◽  
Loan Loss ◽  
Banking Systems ◽  
Loan Loss Provisions

The purpose of this paper is to provide banking regulators with another tool to crosscheck the appropriateness and consistency of levels of capital adequacy for banks. The process begins by examining banking systems and focuses on market risks and the systemic risks associated with growing global economic integration and associated systemic interdependence. The model provides benchmarks for economic and regulatory capital for international banking systems using country, regional and global stock‐market generated price index returns data. The benchmarks can then be translated to crosschecking capital levels for banks within those systems. For analytical purposes systems are assumed to possess a degree of informational efficiency and credit, liquidity and operational risks are held constant or at least assumed to be covered in loan loss provisions. An empirical study is included that demonstrates how market risk and systemic risk can be accounted for in a benchmark banking system performance model. Full testing of the model is left for future research. The paper merely proposes that such an approach is feasible and useful and it is in no way intended to be a replacement for the current Basel Accord.

The Value-at-Risk Methodology of Basel II and Basel III

2014 ◽  
pp. 100-114 ◽  
Keyword(s):  
At Risk ◽  
Risk Management ◽  
Value At Risk ◽  
Basel Ii ◽  
Risk Measurement ◽  
Capital Adequacy ◽  
Basel Iii ◽  
Regulatory Capital ◽  
Advantages And Disadvantages ◽  
Risk Methodology

This chapter examines the advantages and disadvantages of the risk estimate approach—Value-at-Risk (VaR) which has been extensively embraced by regulators and practitioners in financial markets under the Basel II & III framework as the basis of risk measurement, both for the purpose of ensuring regulatory capital adequacy, and risk management and strategic planning at industry level.

scholarly journals Loan Portfolio Risk and Capital Adequacy: A New Approach to Evaluating the Riskiness of Banks

2019 ◽  
Author(s):  
Charles M.C. Lee ◽  
Qinlin Zhong ◽  
Yanruo Wang
Keyword(s):  
Capital Adequacy ◽  
Portfolio Risk ◽  
Loan Portfolio ◽  
New Approach

Managing biohazards and environmental safety

2016 ◽  
Author(s):  
Ferenc Kovari ◽  
Gilbert Park
Keyword(s):  
Psychological Factors ◽  
Critical Care Unit ◽  
Environmental Safety ◽  
New Approach ◽  
Safe Environment ◽  
Protective Gear ◽  
Chemical Agents ◽  
Chemical Hazard ◽  
As Stress ◽  
Regular Training

This chapter highlights the most common sources of biohazards in a critical care unit and points out the importance of a safe environment. Detailed information is provided on various biological and chemical agents, including risks posed by radiation. As part of the topic of health care ergonomics, various issues are discussed. Washing hands is the key to reducing biological hazards. Wearing appropriate protective gear minimizes the risk of chemical hazard. Complying with safety rules and attending regular training help avoiding risks resulting from handling dangerous materials, electronic equipment. As a new approach we included the potential risk of psychological factors such as stress and noise.

The Financial Crisis, Basel Accords and Bank Regulations: An Overview

2017 ◽  
Vol 7 (2) ◽  
pp. 225
Author(s):  
Mona A. ElBannan
Keyword(s):  
Risk Management ◽  
Financial Crisis ◽  
Banking Sector ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Management Tools ◽  
Information Transparency ◽  
Minimum Capital ◽  
Basel Accords ◽  
As Stress

This theoretical study presents the different phases for the evolution of Basel Accords since 1988, and the continual efforts of Basel Committee on banking supervision to set out an effective framework to improve the banking sector governance and performance. In literature, compliance with Basel requirements concerning minimum capital requirements, powerful supervision and effective market discipline through information transparency and disclosure have attracted many researchers to study its impact on bank performance and cost of capital. In spite of the risk-based capital adequacy, regulatory and supervisory requirements set by Basel Accords, the financial crisis 2007, which causes instability and turmoil in the whole banking sector, was induced mainly by weak risk management measures, such as stress testing and other risk management tools that were unable to forecast the losses and the adverse unexpected outcomes and determine the size of capital needed to overcome severe shocks.

Plastic flow and fracture of glass

1964 ◽  
Vol 282 (1388) ◽  
pp. 33-43 ◽  
Keyword(s):  
Plastic Flow ◽  
Energy Balance Equation ◽  
Static Fatigue ◽  
Secondary Effects ◽  
New Approach ◽  
Theoretical Support ◽  
A Value ◽  
Fracture Theory ◽  
As Stress ◽  
Almost All

It is usual to regard glass as a purely brittle solid and this has been taken for granted in almost all past papers on the mechanical strength, static fatigue, and ageing properties of glasses. However, in the present note this approach is rejected as being incompatible with experimental evidence of plastic flow in glass, and incapable of explaining the strengths observed. Instead a completely new approach is attempted in which glass is treated as an elastic-plastic solid and a complete theory of glass flow and strength is developed. The note summarizes the contents of three papers soon to be published which develop these ideas in more detail, and readers are referred to these three papers (Marsh 1964 a , b , c ) for full experimental and theoretical support of the ideas presented here. In brittle fracture theory glass is expected to exhibit its theoretical cohesive strength if it is flaw-free (e. g. untouched glass fibre), but if handled surface cracks are introduced and the strength should fall to a value predicted either by the Griffith (1920) energy balance equation or by the known stress concentration factor at the crack tip. Secondary effects such as static fatigue and ageing can then be explained as stress corrosion phenomena.

scholarly journals Molecular Modelling in Chromatostructural Analysis: A New Approach to the GC/MS Study of Isomers

1997 ◽  
Vol 15 (2) ◽  
pp. 115-123 ◽  
Author(s):  
Nickolay S. Kulikov
Keyword(s):  
Mass Spectrometry ◽  
Gas Chromatography ◽  
Molecular Mechanics ◽  
Additional Data ◽  
Graphitized Carbon Black ◽  
Gas Chromatography Mass Spectrometry ◽  
Molecular Models ◽  
New Approach ◽  
Graphitized Carbon ◽  
Retention Parameters

The importance of gas-solid chromatography as a source of additional data for the positive structural elucidation of novel isomers by gas chromatography/mass spectrometry is discussed. As an example, a mixture of 11 isomers of perhydroanthracene and perhydrophenanthrene has been considered. The retention parameters of these isomers on thermally graphitized carbon black (TGCB) were calculated by Kiselev's method to predict the order of their separation on a column packed with TGCB. The molecular models required for these calculations were constructed using a conventional approach and molecular mechanics; the corresponding results obtained are compared. The order of separation predicted by molecular mechanics appeared close to that observed experimentally.

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