1 test cases elaboration process andrés Álvarez vázquez university of oviedo
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TEST CASES ELABORATION PROCESS
Andrés Álvarez VázquezUniversity of Oviedo
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CALCULATION OF MINIMUM CAPITAL REQUIREMENTS
CREDIT RISK
The Standardised Approach(2 test cases)
The Internal Ratings-Based Approach (1 test case)
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REFERENCES
BANK FOR INTERNATIONAL SETTLEMENTSBASEL COMMITTEE ON BANKING SUPERVISION
INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS (BASEL I)
INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS – A Revised Framework (BASEL II)
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REFERENCES
EUROPEAN UNION
RE-CASTING DIRECTIVE 2000/12/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL OF 20 MARCH 2000
RELATING TO THE TAKING UP AND PURSUIT OF THE BUSINESS OF CREDIT INSTITUTIONS AND COUNCIL DIRECTIVE 93/6/EEC
OF 15 MARCH 1993 ON THE CAPITAL ADEQUACY OF INVESTMENT FIRMS AND CREDIT INSTITUTIONS
(PARTS 1 AND 2 AND ANNEXES TECHNIQUES)
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COMMON PROBLEMS
Difficulties for non-specialist in banking operations
Information required: development of our own cases
For banks:* Data collection process* High costs
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THE STANDARDISED APPROACH
Credit risk measurement in a standardised manner, supported by external credit assessments
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THE STANDARDISED APPROACH
Claims on sovereigns: OECD country risk classification
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OECD CREDIT RISK CLASSIFICATION
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THE STANDARDISED APPROACH
Other exposures:
ECAIs risk classification (Standard & Poor’s)
Credit risk set in Directive
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Exposure Value
-Value Adjustments and Provisions
= Exposure Net of Value Adjustments and Provisions
THE STANDARDISED APPROACHFilling the templates
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FULLY ADJUSTED EXPOSURE VALUE (E*) CALCULATED AS SET IN DIRECTIVE
E* = max {0, [(∑(E) - ∑(C)) + ∑(|net position in each security| x Hsec) + (∑|Efx| x Hfx)]}
IN OUR TEST CASES: NO CREDIT RISK MITIGATION TECHNIQUES HAVE BEEN USED, SO:
E* = EXPOSURE NET OF VALUE ADJUSTMENTS AND PROVISIONS
THE STANDARDISED APPROACHFilling the templates
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THE STANDARDISED APPROACHFilling the templates
OUR TEST CASES: ON-BALANCE SHEET ITEMS
RISK WEIGHTED EXPOSURE AMOUNT CALCULATED AS A PERCENTAGE OF E*
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THE STANDARDISED APPROACHFilling the templates
RISK WEIGHTS ACCORDING TO ANNEX VIII OF THE DIRECTIVE
CAPITAL REQUIREMENTS = 8% x RISK WEIGHTED EXPOSURE AMOUNT
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THE STANDARDISED APPROACHFilling the templates
• SIMPLE CASES• PROBLEMS:
- CRM TECHNIQUES E*
- OFF-BALANCE SHEET ITEMS
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THE STANDARDISED APPROACHFilling the templates
LEGAL REFERENCES AND COMMENTS IN THE TEMPLATES
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THE IRB APPROACHFilling the templates
COMPETENT AUTHORITIES MAY PERMIT CREDIT INSTITUTIONS TO CALCULATE THEIR RISK-WEIGHTED EXPOSURE AMOUNTS USING THE INTERNAL RATINGS BASED APPROACH
CREDIT INSTITUTION’S SYSTEMS FOR THE MANAGEMENT AND RATING OF CREDIT RISK EXPOSURES ARE IMPLEMENTED WITH INTEGRITY AND IF THEY MEET THE STANDARDS SET IN DIRECTIVE, ANNEX VII
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• CREATION OF OBLIGOR RATING SCALE
• SEVEN GRADES + ONE MORE FOR PAST-DUE (minimum number of grades)
OBLIGOR GRADE: risk category within a rating system’s obligor rating scale to which obligors are assigned
THE IRB APPROACHFilling the templates
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THE IRB APPROACHFilling the templates
• AVERAGE PD ASSIGNED TO THE OBLIGOR GRADE (minimum 0.03%)
• EXPOSURE WEIGHTED AVERAGE LGD 45%
• MATURITY VALUE (M) 2.5 YEARS
RISK WEIGHT
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THE IRB APPROACHFilling the templates
LGD: 45% 45%
Maturity
PD:
1 0,03% 15,00% 4,00%2 1,00% 95,00% 45,00%3 2,50% 120,00% 60,00%4 4,00% 140,00% 65,00%5 6,00% 160,00% 70,00%6 10,00% 190,00% 90,00%7 15,00% 220,00% 100,00%
PAST-DUE 100,00% 550,00% 130,00%
OBLIGOR GRADE
2,5 years
Asset class:Corporate exposures
Other retail exposures
50Turnover (millions of €)
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THE IRB APPROACHFilling the templates
LEGAL REFERENCES AND COMMENTS IN THE TEMPLATES (IRB Ref List):
Exposure weighted average LGD* (%)
Annex XII, Part 3, paragraph 14 e.ii)(DISCLOSURE REQUIREMENTS)
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THE IRB APPROACHFilling the templates
LEGAL REFERENCE:
ANNEX VIII: Credit Risk Mitigation
PART 3: Calculating the effects of CRM
Par. 62: LGD* = Max {0, LGD x [(E*/E]}
(no CRM in test case 03)
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TEST CASES ELABORATION PROCESS
INFORMATION REQUIRED
TEMPLATES REFERENCE LIST & COMMENTS