The New Approach for Risk Regulation in Banks

The purpose of this report is to present the necessity of proceeding to new reforms in bank regulation and to increase the stability and risk sensitivity of the capital base under applying the Standardised Credit Risk Assessment Approach (SCRA) in banks. The dynamics in the bank regulation and supervision of credit risk assessment approaches are explored. In the paper, a thorough theoretical-methodological and historical-logical analysis was made of the evolution of the development and chronology of the global regulatory frameworks for banks - Basel 1, Basel 2 and Basel 3. The contemporary projections and challenges for the banks' management under the new regulatory and institutional changes are presented. The SCRA is a positive asset in bank capital regulation in contemporary banking. The revisions to the regulatory framework – Basel 3 by is a long continuous process influenced by numerous economic, social and political factors. The preparation of the Bulgarian banking system for a new reform of financial regulation is analyzed. The need for adoption of a new risk-based approach for capital assessment and the importance of transparency in bank financial reporting is proved.

Credit risk management in bank: Impacts of IFRS 9 and Basel 3

The expected loss approach (ECL) defined by IFRS 9 replaced the old incurred loss approach (IAS 39) in the international accounting standard setter. In Europe, the IFRS 9 are accompanied by new regulatory frameworks (BCBS), opinion, technical standards (EBA) which do not always provide the same methodological and operational implications of the accounting standard setter. Many aspects of IFRS 9 have been studied, but this paper analyzes its interdependencies and overlaps with the credit risk framework for financial intermediaries (also Basel 3). Using a case study, the purpose of this paper is to investigate the ECL, its main impacts on coverage ratio of a loan’s portfolio. The main findings are: usually, the rules laid down for Stage 1 of IFRS 9 do not reduce the excess coverage produced on a portfolio in bonis; in the presence of impaired loans IAS 39 generates a lack of funds; the lifetime ECL (Stage 2 of IFRS 9) imposes excess of provisions because it does not consider the effect of coverage produced by expected premiums; for loan portfolios with short repayment times, the excess of provisions produced by IFRS 9 compensates the lack of coverage of the capital requirement. From the academic research perspective, this paper contributes to the literature on ECL model in several ways. First, it adds knowledge to the research on the relationship between Credit Risk Management framework and accounting standard IFRS 9. Second, it also links our findings related to ECL approach with potential implications for the financial sector, policymakers and regulators.

INTERNATIONAL MANAGEMENT SYSTEM FOR THE ECONOMIC SECURITY OF THE BANKING SECTOR

The article discusses the most pressing issue of ensuring the economic security of the banking sector through international management systems. The authors analyze the protection of banks and the banking system from external and internal factors. Russia's transition from Basel-1 to Basel-3 directly had a beneficial effect on the stability of the banking system during the crisis. The reforms proposed by the Basel Committee, in turn, are aimed directly at strengthening microprudential regulation. It is proposed to highlight two factors that will have a positive effect on the Russian banking system with the adoption of Basel-3. The article will be of interest to economists working in the banking sector.

Part III Investment Banking, 14 Trading Book—Models

The key to market risk is the calculation of position risk requirement (PRR). Basel 3 has radically changed the approach to the calculation of position risk for regulated firms, and this chapter deals with the ‘before and after’ element to it. A firm must calculate a PRR in respect of all its trading book positions, all foreign exchange positions, and all positions in commodities (including physical commodities) whether or not in the trading book. A firm must also be able to monitor its total PRR on an intra-day basis. The remainder of the chapter covers trading book eligibility under Basel 2.5, trading and market exposures, equity PRR and basic interest rate PRR for equity derivatives, commodity PRR, foreign currency PRR, option PRR, credit derivatives, and underwriting positions.

Part III Investment Banking, 12 The Trading Book

This chapter begins by discussing market risk in the Basel framework. Market risk was a relative latecomer to the Basel framework. Although the original Accord was signed in 1988, it was only in 1996 that the amendment to incorporate market risks was implemented. Market risk in the trading book is comprised of two significant components: position risk, which measures the risk of a change in the value of assets held; and counterparty credit risk, which measures the riskiness of counterparties to derivatives, options, and other trading positions. The remainder of the chapter covers trading book eligibility under Basel 2.5 and Basel 3.

Part V Liquidity and Leverage, 23 The Leverage Ratio

This chapter discusses the leverage ratio under Basel 3. The leverage ratio was initially implemented as a disclosure standard, with the aim of becoming a mandatory requirement as from 1 January 2018. Basel 3 provides that the original 2014 standard should become binding as a requirement from 2018 to 2021, with the revised Basel 3 requirement taking effect as from 1 January 2022. All banks are required to maintain a leverage ratio of 3 per cent at all times. However, in addition to the 3 per cent requirement, they must also meet a leverage ratio buffer requirement. Both of these requirements must be met with tier 1 capital. The leverage ratio buffer will be set at 50 per cent of a bank's G-SIB buffer.