Seminar2-Topic2-FinancialInstitutions(CommercialBanks).pptVIP

BASEL II STRUCTURAL FRAMEWORK CONT. Pillar 1—Capital adequacy cont. Credit risk cont. Internal ratings-based approach involves banks using some or all of their own risk measurement model factors, subject to supervisor approval. Two approaches available: 2. Foundation internal ratings-based approach FIRB Bank determines probability of default and effective maturity but relies on supervisor estimates for other credit risk components 3. Advanced internal ratings-based approach AIRB Bank provides estimates of all credit risk components 2-* MAF702: Financial Markets Financial Institutions: commercial banks Topic 2: Chapter 2 BASEL II STRUCTURAL FRAMEWORK CONT. Pillar 1—Capital adequacy cont. Operational risk—risk of loss from inadequate or failed internal processes, people and systems, or from external events e.g. internal/external fraud, workplace safety, business practices, damage to physical assets, systems failure Main operational risk management objectives: Operational objectives—impact of loss of business function integrity and capability Financial objectives—losses due to operational risk exposure, cost of recovering operations and ongoing financial losses Regulatory objectives—prudential standards of bank supervisors Business continuity management and additional capital 2-* MAF702: Financial Markets Financial Institutions: commercial banks Topic 2: Chapter 2 BASEL II STRUCTURAL FRAMEWORK CONT. Pillar 1—Capital adequacy cont. Market risk—risk of losses resulting from changes in market rates in FOREX, interest rates, equities and commodities General market risk changes in the overall market for interest rates, equities, FOREX and commodities Specific market risk changes in the value of a security due to issuer-specific factors. Affects only interest rate and equity positions of institutions Two approaches to market risk capital requirements Internal model—requires a statistical probability model that measures financial risk exposures, i.e. valu