scholarly journals Recent Issues in the Implementation of the New Basel Minimum Capital Requirements for Market Risk

2018 ◽  
Vol 2 (2) ◽  
Author(s):  
J. Orgeldinger
Keyword(s):  
Internal Model ◽  
Weighted Average ◽  
Market Risk ◽  
Capital Requirements ◽  
Risk Models ◽  
Minimum Capital ◽  
Basel Committee ◽  
Risk Framework ◽  
Theoretical Foundations ◽  
Model Approach

The Basel Committee suggested new ways of dealing with market risk in banks’ trading and banking books, in its October 2013 consultative paper, and subsequent versions published thereafter, for revised market risk framework FRTB. The Basel Committee estimates that the new rules will result in an approximate median capital increase of 22% and a weighted average capital increase of 40% (BCBS 2016), compared with the current framework. Budget reports on FRTB implementation range from costs of 5-million USD to 250-million USD. Key changes can be found in the internal model approach, in the standard rules and in the approval process. Significant changes introduced by the FRTB include stricter separation of the trading and banking book. Regardless of whether they use standardized or internal models, banks will need to review their portfolios to determine if existing classifications of instruments and desks as trading or banking book are still applicable, or whether a revision of desk structure is needed. In its article ‘Critical appraisal of the Basel fundamental review of the trading book regulation’ (Orgeldinger 2017) the theoretical foundations of the internal model approach IMA were analysed and the criticisms for FRTB risk models were investigated. A recent onslaught of rules is rendering the existing timeline for implementation practically impossible. In this article we present and critically evaluate different approaches to implement the new rules suggested by academics and major consulting companies.

scholarly journals Critical Analysis of the New Basel Minimum Capital Requirements for Market Risk

2017 ◽  
Vol 1 (1) ◽  
pp. 1
Author(s):  
Joerg Orgeldinger
Keyword(s):  
Default Risk ◽  
Internal Model ◽  
Risk Model ◽  
Weighted Average ◽  
Market Risk ◽  
Capital Requirements ◽  
Minimum Capital ◽  
Basel Committee ◽  
Asymmetric Correlation ◽  
Model Approach

In its October 2013’s consultative paper for a revised market risk framework (FRTB), and subsequent versions published thereafter, the Basel Committee suggests new ways of dealing with market risk in banks’ trading and banking books. The Basel Committee estimates that the new rules will result in an approximate median capital increase of 22% and a weighted average capital increase of 40% [1], compared with the current framework. Key changes can be found in the internal model approach, in the standard rules and in the scope/approval process. Among the significant changes that are being introduced by the FRTB is a stricter separation of the trading book and banking book. Regardless of whether they use standardised or internal models, banks will need to review their portfolios to determine if existing classifications of instruments and desks as trading book or banking book are still applicable or whether a revision of desk structure is needed. In this article, we analyse the theoretical foundations of the internal model approach (IMA), which are the stressed expected shortfall, liquidity adjustments, default & migration risk and non-modellable risk factors. We thoroughly investigate the criticisms for Internal Risk Model (IMA) and the introduction of a standardised floor, the sensitivity based approach (SBA) with Delta, Vega and Curvature, shock scenarios and the aggregation with asymmetric correlation and reflection of basis/default risk.

Foreign exchange positions and risks of czech banks

1997 ◽  
Vol 6 (1) ◽  
Author(s):  
Josef Jílek ◽  
Jiřina Jílková
Keyword(s):  
Foreign Exchange ◽  
Banking System ◽  
Market Risk ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Minimum Capital ◽  
Market Risks ◽  
Current State ◽  
National Bank ◽  
Foreign Exchange Trading

Almost every bank has some degree of foreign exchange exposure. A bank, which holds net open positions in foreign currencies is exposed to the risk that exchange rates may move against it. Net open positions are due to foreign exchange trading positions or because of exposures caused by firm's overall assets and liabilities. Czech National Bank has imposed limits of FX risks and is thus limiting maximum potential loss of the Czech banking system. The paper describes the way how to calculate a bank's open FX positions and the current state of FX positions in selected Czech commercial hanks. The FX risk is a part of market risk. The Capital Adequacy Directive (CAD) and Basle Committee on Banking Supervision in its document Amendment to the Capital Accord to Incorporate Market Risks set out the minimum capital requirements for credit institutions and investment firms with respect to market risk.

scholarly journals Znaczenie agencji oceniających (ratingowych) po wprowadzeniu w 2004 roku przez Komitet Bazylejski Nowej Umowy Kapitałowej

2004 ◽  
pp. 101-112
Author(s):  
Monika Gładysz
Keyword(s):  
Capital Requirements ◽  
Capital Adequacy ◽  
Special Importance ◽  
Banking Supervision ◽  
External Assessment ◽  
Minimum Capital ◽  
Basel Committee

Basel Committee on Banking Supervision published in 2004 the New Capital Adequacy Framework. A special importance is assigned in this document to the external assessment agencies. Banks will have to determine the minimum capital requirements on the basis of assessments by the external agencies. The role of the external assessment agencies in the New Capital Adequacy Framework and potential threats and benefits from using by banks the external assessments for determination of the. minimum capital requirements are presented in the paper.

Comprehensive risk measure – current challenges

2014 ◽  
Vol 22 (3) ◽  
pp. 271-284 ◽  
Author(s):  
Lukasz Prorokowski ◽  
Hubert Prorokowski
Keyword(s):  
Value At Risk ◽  
Risk Measure ◽  
Market Risk ◽  
Structured Interviews ◽  
Regulatory Requirements ◽  
Risk Models ◽  
Content Type ◽  
Basel Committee ◽  
New Methodologies ◽  
Global Banks

Purpose – This paper, based on case-studies with five universal banks from Europe and North America, aims to investigate which types of comprehensive risk measure (CRM) models are being used in the industry, the challenges being faced in implementation and how they are being currently rectified. Undoubtedly, CRM remains the most challenging and ambiguous measure applied to the correlation trading book. The turmoil surrounding the new regulatory framework boils down to the Basel Committee implementing a range of capital charges for market risk to promote “safer” banking in times of financial crisis. This report discusses current issues faced by global banks when complying with the complex set of financial rules imposed by Basel 2.5. Design/methodology/approach – The current research project is based on in-depth, semi-structured interviews with five universal banks to explore the strides major banks are taking to introduce CRM modelling while complying with the new regulatory requirements. Findings – There are three measures introduced by the Basel Committee to serve as capital charges for market risk: incremental risk charge; stressed value at risk and CRM. All of these regulatory-driven measures have met with strong criticism for their cumbersome nature and extremely high capital charges. Furthermore, with banks facing imminent implementation deadlines, all challenges surrounding CRM must be rectified. This paper provides some practical insights into how banks are finalising the new methodologies to comply with Basel 2.5. Originality/value – The introduction of CRM and regulatory approval of new internal market risk models under Basel 2.5 has exerted strong pressure on global banks. The issues and computational challenges surrounding the implementation of CRM methodologies are currently fiercely debated among the affected banks. With little guidance from regulators, it remains very unclear how to implement, calculate and validate CRM in practice. To this end, a need for a study that sheds some light on practices with developing and computing CRM emerged. On submitting this paper to the journal, we have received news that JP Morgan is to pay four regulators $920 million as a result of a CRM-related scandal.

scholarly journals Basel IV A gloomy future for Expected Shortfall risk models. Evidence from the Mexican Stock Market

2019 ◽  
Vol 14 (PNEA) ◽  
pp. 559-582
Author(s):  
Adrián F. Rossignolo
Keyword(s):  
Stock Market ◽  
Emerging Markets ◽  
Latin American ◽  
Financial Crises ◽  
Capital Requirements ◽  
Expected Shortfall ◽  
Risk Models ◽  
Minimum Capital ◽  
Modelling Techniques ◽  
Calibration Parameters

To determine the sufficiency of Minimum Capital Requirements (MCR) in Basel IV during financial crises in the Mexican stock market, the paper performs a structural simulation encompassing both the Standardised (SA) and Internal Models Approach (IMA) employing different modelling techniques. The study finds an excessive increase in MCR even in abnormal slumps, furthermore stressing that SA establishes a high floor and only super-leptokurtic models are able to pass its stringent validation standards. Therefore, it is recommended that elements in SA be adaptable to avoid unnecessary capital largeness and the evaluation of the IMA and its interaction with SA revised. Although the outcomes strongly suggest the need to perform adjustments in the regulations, further tests on more markets could help bolster the results, despite the study ranking among the first to assess the adequacy and interplay between Basel IV’s two approaches in Latin American emerging markets. The upshot indicates that Basel IV renders high MCR even for huge falls, placing models at a disadvantage and discouraging its use. The adoption of flexible calibration parameters would align both avenues, facilitating its application.

Basel Capital Adequacy Ratio Standard in The Light of Islamic Law Perspective

2016 ◽  
Vol 1 ◽  
pp. 308-317
Author(s):  
Adi Rahmanur Ibnu
Keyword(s):  
Financial Crises ◽  
Global Economy ◽  
Banking Sector ◽  
Islamic Law ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Minimum Capital ◽  
Capital Adequacy Ratio ◽  
Global Banking ◽  
Banking Development

Bank is one of the most important pillars of economy activities. However, banking sector has a real potential crisis threat. Alongside with the steady current global banking development, financial crises that have happened clearly affected global economy. Based on that situation, BIS (Bank for International Settlement) – an international financial standard setting organization, realizes the urgency to establishan international financial standard and supervision to anticipate future potential financial crises. This research aims to identify how Capital Adequacy Ratio Standard in Basel Capital Accord (II) based on Islamic law perspective. The research is conducted by analyzing Basel Capital Accord published by BIS. The research uses library research method to find out the aimed result. The focus is on the 1st pillar of Basel II publication that is Minimum Capital Requirements (CAR) policy. CAR, as an Islamic economics policy, will be analyzed using falāḥ approach. Falāḥ is an Islamic economics objective that consists of happiness, success, accomplishment or good luck concept. The earthly dimension of falāḥ has some parameters that can be used to analyze Islamic economics policy. Additionally, the Islamic fiqh maxim takes part in analyzing the policy. The maṣlaḥat concept in fiqh maxim approach shares aim with falāḥ concept in the sense that all of sharia law aims for success, happiness, eternal survival etc. The maṣlaḥat can be accomplished by extinguishing mafsadat or seizing maṣlaḥat. The maṣlaḥat aspect is essential to determine the compatibility Basel Capital Accord with jurisprudential maxim i.e harm must be dispelled (al-dharāru yuzāl). The conclusion results are, 1) Basel Capital Accord focuses on macro-prudential aspect in order to anticipate potential financial crises, 2) beneficial/interest (maṣlaḥat) aspects of the hereafter, cooperation principle, justice, fairness and the prohibition of exploitation are not the core value of Basel Capital Accord frame work, thus 3) the achievement of maslahat as intended by sharia i.e. jurisprudential maxim are not convincing. Therefore, 4) Basel Capital Accord as a regulation basis is not in line with jurisprudential maxim i.e harm must be dispelled (al-dharāru yuzāl).

Islamic Banking Regulations in Light of Basel II

2010 ◽  
Vol 27 (1) ◽  
pp. 74-101 ◽  
Author(s):  
M. Kabir Hassan ◽  
Muhammad Abdul Mannan Chowdhury
Keyword(s):  
Financial Institutions ◽  
Banking Regulation ◽  
Capital Requirements ◽  
Basel Ii ◽  
Capital Adequacy ◽  
Regulatory Agencies ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Minimum Capital ◽  
Regulatory Standards

This paper seeks to determine whether the existing regulatory standards and supervisory framework are adequate to ensure the viability, strength, and continued expansion of Islamic financial institutions. The reemergence of Islamic banking and the attention given to it by regulators around the globe as to the implications of a recently issued Basel II banking regulation makes this article timely. The Basel II framework, which is based on minimum capital requirements, a supervisory review process, and the effective use of market discipline, aligns capital adequacy with banking risks and provides an incentive for financial institutions to enhance risk management and their system of internal controls. Like conventional banks, Islamic banks operate under different regulatory regimes. The still diverse views held by the regulatory agencies of different countries on Islamic banking and finance operations make it harder to assess the overall performance of international Islamic banks. In light of the increased financial innovation and diversity of instruments offered in Islamic finance, the need to improve the transparency of bank operations is particularly relevant for Islamic banks. While product diversity is important in maintaining their competitiveness, it also requires increased transparency and disclosure to improve the understanding of markets and regulatory agencies. The governance of Islamic banks is made even more complex by the need for these banks to meet a set of ethical and financial standards defined by the Shari`ah and the nature of the financial contracts banks use to mobilize deposits. Effective transparency in this area will greatly enhance their credibility and reinforce their depositors and investors’ level of confidence.

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