FINS 3650 Topic 9 PJ V6
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FINS 3650 – International banking
Topic 9: Economic capital and risk-adjusted returns © Dr Peter John, peter.kavalamthara@unsw.edu.au
1
© Dr Peter John
Agenda
What is Economic Capital?
Business Imperative for Economic Capital
Framework
The Regulatory Imperative – Basel Pillar 2 & ICAAP
Economic Capital and Performance Management
Risk appetite
© Dr Peter John
2
1
Course schedule
1. Course overview and introduction 7 & 8. Market risk and liquidity 2. Country risk
9. Economic capital &
risk-adjusted return
3. Risk and regulation
4. Capital management
10. Int. trade & investm’t
5. Credit risk
11. Cross border risks
6. Operational risk
12. Review & revisions
©©Dr
DrPeter
PeterJohn
John
3
Assessments
Assessment
Class participation
Weight
15%
Group assignment
Mid-semester exam
Final exam
35%
20%
30%
©©Dr
DrPeter
PeterJohn
John
4
2
What is economic capital?
Economic capital is mathematically determined to cover ‘unexpected losses’ at a stated level of confidence (probability)
The concept of Expected and Unexpected Losses
Expected losses: Part of business as usual, and are covered by reserves and income (and not capital)
Unexpected losses: Losses due to unexpected events (e.g. September 11)
Economic Capital is the capital required to protect the bank from unexpected losses, except the ‘catastrophic events’
External rating ambitions of banks determine to what extent (that is, probability) unexpected losses are to be covered by Economic Capital
Probability of Loss
Solvency Standard
BBB A
.003
Expected Loss
.001
AA AAA
.0003 .0001
Economic Capital
Amount of
Loss
Unexpected losses
© Dr Peter John
Global Systematically Important Banks
(G-SIB)
Essential reading 1 (Topic 7 Part B): Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement • What are the imperatives for establishing G-SIBs?
• Critique the approach adopted for identifying GSIBs.
•
.
.
FINS 3650 – International banking
Topic 9: Economic capital and risk-adjusted returns © Dr Peter John, peter.kavalamthara@unsw.edu.au
1
© Dr Peter John
Agenda
What is Economic Capital?
Business Imperative for Economic Capital
Framework
The Regulatory Imperative – Basel Pillar 2 & ICAAP
Economic Capital and Performance Management
Risk appetite
© Dr Peter John
2
1
Course schedule
1. Course overview and introduction 7 & 8. Market risk and liquidity 2. Country risk
9. Economic capital &
risk-adjusted return
3. Risk and regulation
4. Capital management
10. Int. trade & investm’t
5. Credit risk
11. Cross border risks
6. Operational risk
12. Review & revisions
©©Dr
DrPeter
PeterJohn
John
3
Assessments
Assessment
Class participation
Weight
15%
Group assignment
Mid-semester exam
Final exam
35%
20%
30%
©©Dr
DrPeter
PeterJohn
John
4
2
What is economic capital?
Economic capital is mathematically determined to cover ‘unexpected losses’ at a stated level of confidence (probability)
The concept of Expected and Unexpected Losses
Expected losses: Part of business as usual, and are covered by reserves and income (and not capital)
Unexpected losses: Losses due to unexpected events (e.g. September 11)
Economic Capital is the capital required to protect the bank from unexpected losses, except the ‘catastrophic events’
External rating ambitions of banks determine to what extent (that is, probability) unexpected losses are to be covered by Economic Capital
Probability of Loss
Solvency Standard
BBB A
.003
Expected Loss
.001
AA AAA
.0003 .0001
Economic Capital
Amount of
Loss
Unexpected losses
© Dr Peter John
Global Systematically Important Banks
(G-SIB)
Essential reading 1 (Topic 7 Part B): Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement • What are the imperatives for establishing G-SIBs?
• Critique the approach adopted for identifying GSIBs.
•