Economic Capital Allocation with Basel II Cost Benefit and Implementation Procedures 1st Edition by Dimitris Chorafas ISBN 978-0750661829 0750661828
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Product details:
ISBN 10: 0750661828
ISBN 13: 978-0750661829
Author: Dimitris N. Chorafas
This book is a complimentary follow-on book to Operational Risk Control with Basel II. While the previous book focuses on operational risk, Economic Capital Allocation provides an overview of credit risk within the context of the Basel II accords.The book provides:* comprehensive coverage of the evolution of the banking industry with Basel II in mind* extensive information on the capital requirements for bank liquidity and solvency * coverage of the new rules as laid down by the supervisory authorities of the Group of Ten industrialized nations* key information on the technical requirements for credit institutions such as: new credit rating scales, modeling of credit risk, control of operational risks, and, novel ways and means for the management of exposure to Credit Risk
* Basel II accords must be implemented by 2006 and require 2 years preparation for proper implementation* Author at the forefront in the development of the Basel II Capital Adequacy Accord * Based on intensive research in the US, UK and continental Europe
Table of contents:
Warning: Basel II, the October 11, 2003, announcement and its aftermath
1 Introduction
2 Basel II implementation timetable
3 Changes affecting IRB, EL and UL
4 Bankers appreciate crisp definitions
5 Computation of unexpected losses
6 The home-host issue
7 A preview of Basel III
X
Abbreviations
Part 1: Commercial banks and the new regulation
1 Basel II, impact studies and cost of implementation
1.1 Introduction
1.2 The three pillars of Basel II
1.3 A bird’s eye view of standardized, foundation IRB and advanced IRB methods
1.4 Quantitative impact studies and capital adequacy
1.5 Examples of the potential sophistication of A-IRB method
1.6 The cost of Basel II
1.7 Business risk and cost control
1.8 Is Basel III coming at the heels of Basel II?
2 Benefits from risk-based pricing and rating targets
2.1 Introduction
2.2 Risk-based pricing: a major benefit from Basel II
2.3 Targeting an ‘AA’ and ‘AA+’ rating
2.4 How will Basel II affect credit institutions?
2.5 Benefits on the road from Basel I to Basel II
2.6 Basel II objectives and the effect of leverage
2.7 The need for a devil’s advocate in risk management
2.8 A-IRB, Basel II and the German Savings Banks: a case study
2.9 Looking at the Sparkasse Lüneburg project and its advantages
3 Regulatory capital defined
3.1 Introduction
3.2 The role of regulatory capital
3.3 Components of regulatory capital
3.4 Beyond Tier 1: the Tier 2 and Tier 3 regulatory capital
3.5 Pricing assets in Tier 1 and Tier 2 capital
3.6 Accounting for risks assumed with lending
3.7 Provisioning for bad loans under the new framework
4 Market discipline and its global impact
4.1 Introduction
4.2 Market discipline and enhanced financial disclosure
4.3 Qualitative and quantitative information in financial reporting
4.4 Credit ratings are a tool of market discipline
4.5 Important notions about risk grades and rating systems
4.6 Market discipline and management of default risk
4.7 Winners and losers with the new regime
Part 2: The allocation of economic capital to business units
5 Economic capital defined
5.1 Introduction
5.2 A close look at economic capital
5.3 Emphasizing total economic equity
5.4 Economic capital, contingent assets and contingent liabilities
5.5 Economic capital and management accounting
5.6 Synergy between economic capital and risk management
5.7 Economic capital and the impact of default models
6 Economic capital and solvency management
6.1 Introduction
6.2 Practical examples with Basel II implementation
6.3 Economic capital and an institution’s solvency
6.4 Solvency and the regulation of insurance companies
6.5 A practical look at position risk
6.6 Stress testing risk positions
7 Economic capital allocation: practical applications and theoretical background
7.1 Introduction
7.2 Role of the corporate center in economic capital allocation
7.3 Top-down and bottom-up identification of economic capital requirements
7.4 Economic capital allocation at Rabobank, Credit Suisse, Deutsche Bank and Citigroup
7.5 Citigroup’s adjustment factor: an example with operational risk
7.6 Developing a theoretical framework for capital allocation
7.7 An algorithmic solution for unexpected losses by the Deutsche Bundesbank
8 Evolving rules and procedures for economic capital allocation
8.1 Introduction
8.2 Corporate focus on economic capital allocation
8.3 Real-life examples with economic capital allocation to business units and channels
8.4 First-order and second-order risks
8.5 Learning a lesson from physical sciences
8.6 The issue of procyclicality and its impact on economic capital
8.7 Banco de España: case study on an initiative against procyclicality
9 Strategies used by banks to increase their capital base
9.1 Introduction
9.2 The Modigliani-Miller hypothesis on equity vs debt
9.3 Leveraging increases significantly the probability of default
9.4 Economic capital increases should only be done in a responsible way
9.5 Diversification in the banking business is often wanting
9.6 Capital arbitrage through securitization
9.7 Statistics on securitized corporate debt and other instruments
Part 3: Defaults, internal ratings and technological solutions
10 Default defined
10.1 Introduction
10.2 Default milestones
10.3 Definition of default point
10.4 Contribution of default point to credit risk strategy
10.5 Credit risk information can be painful news
10.6 Expected default frequency and the database
11 IRB, technological infrastructure, models and correlations
11.1 Introduction
11.2 IRB and the technology needed by credit institutions
11.3 Twenty-first century real-time and real-space in the banking industry
11.4 Requirements for efficient IRB modeling
11.5 Management must be careful with models and statistics
11.6 The calculation and evaluation of correlation coefficients
11.7 Are correlation coefficients reliable and well understood?
11.8 Beware of magnitude of risk with correlated exposures
12 Internal ratings, supervisory weights and collateral
12.1 Introduction
12.2 The volatility of capital reserves and Basel II
12.3 Meeting the prerequisites of layers of supervision
12.4 Problems and opportunities associated with risk weights
12.5 A case study with small and medium enterprises
12.6 Risk weights with standardized and IRB methods
12.7 The handling of collateral
12.8 Remargining of collateral, credit derivatives and special vehicles
13 Software which can help in IRB implementation
13.1 Introduction
13.2 Mapping the analysis of bankruptcy patterns
13.3 Marking-to-model the loans portfolio: RAROC and LAS
13.4 Moody’s KMV family of models
13.5 Economic capital allocation by Moody’s KMV portfolio manager
13.6 Sharpe ratio: its usage and misusage
13.7 Implementing the Best Capital Adequacy Ratio
13.8 Using BCAR as a step towards a comprehensive solution
14 How to be in charge of IRB
14.1 Introduction
14.2 The risk of misinterpretation of financial information
14.3 Management quality rating system by Goldman Sachs
14.4 Management’s appreciation of unexpected losses
14.5 Legal risk in a global economy and bankruptcy laws
14.6 Longer-term liability and legal risk
14.7 Rating agencies, legal risk and other risks
Part 4: Regulatory and political issues tend to be indivisible
15 Supervisory authorities and their regulatory policies
15.1 Introduction
15.2 Broader context of Basel II and its implementation
15.3 The need to expand the supervisors’ power of action
15.4 Core Principles, the Financial Stability Forum and the Committee on the Global Financial System
15.5 Group of Seven, Group of Ten and Group of Twenty
15.6 Memoranda of Understanding concerning the offshores and bankruptcies
15.7 Globalization, the wealth of nations and the finance industry
16 Contrarians to Basel II, CAD 3 and 2010 challenges
16.1 Introduction
16.2 Dissent is an integral part of sound governance: the good news
16.3 Reservations about Basel II expressed by professional bodies
16.4 The Shadow Financial Regulatory Committee and its ‘debt is king’ proposal
16.5 The 27 February 2003 testimony to the US Congress Subcommittee
16.6 The eleventh hour is no time for constructive criticisms
16.7 If one does not want to be taken for fool, one should not say foolish things
16.8 Basel II and the EU’s third Capital Adequacy Directive
16.9 The challenge of regulating globalized markets
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Tags: Dimitris Chorafas, Economic Capital, Allocation with Basel, Implementation Procedures