presentation
Basel II
Credit Risk – Regulatory Capital
Vivek Rastogi (Oski Cohort)
EWMBA202: Individual Assignment Paper
Submitted On: 12/04/2013
Table of Contents
3. Basel I Capital Accord 3
4. Basel II Capital Accord 5
4.1 Introduction 5
4.2 The three pillars of the new Accord 5
5. Value at Risk and other financial risk measures 7
5.2 VaR Approaches 8
5.3 Financial Risk Measures 9
6. Credit risk measurement under Basel II Capital Accord 9
6.1 Introduction 9
6.2 The Standardized Approach 10
6.3 Internal Ratings Based Approach 11
6.4 Economic Concepts behind the IRB Capital Requirements Function 12
6.5 Interpreting the IRB Capital Requirements function 13
6.6 Differences between the Foundation and Advanced IRB approaches 19
Abbreviations 23
Conclusions 21
1. Introduction
In past few years, since 2007 the needs for professional skills in the modelling and management of credit risk have rapidly increased and credit risk modelling has become an important topic in the field of finance and banking. While in the past most interests were in the assessments of the individual creditworthiness of an obligor, more recently there is a focus on modelling the risk inherent in the entire banking portfolio. This shift in focus is caused in greater part by the change in the regulatory environment of the banking industry. Banks need to retain part of the total capital as a buffer for unexpected losses on their credit portfolio. The level of capital that needs to be retained is determined by the central banks. In 2007 a new capital accord, the Basel II Capital Accord, became operative. This accord is the successor of the Basel I accord. The capital accords are named after the place where the Bank for International Settlements (BIS) is settled, namely Basel, Switzerland. The BIS gives recommendations concerning banks and other financial institutes on how to manage capital. The influence and reputation of the Basel
Credit Risk – Regulatory Capital
Vivek Rastogi (Oski Cohort)
EWMBA202: Individual Assignment Paper
Submitted On: 12/04/2013
Table of Contents
3. Basel I Capital Accord 3
4. Basel II Capital Accord 5
4.1 Introduction 5
4.2 The three pillars of the new Accord 5
5. Value at Risk and other financial risk measures 7
5.2 VaR Approaches 8
5.3 Financial Risk Measures 9
6. Credit risk measurement under Basel II Capital Accord 9
6.1 Introduction 9
6.2 The Standardized Approach 10
6.3 Internal Ratings Based Approach 11
6.4 Economic Concepts behind the IRB Capital Requirements Function 12
6.5 Interpreting the IRB Capital Requirements function 13
6.6 Differences between the Foundation and Advanced IRB approaches 19
Abbreviations 23
Conclusions 21
1. Introduction
In past few years, since 2007 the needs for professional skills in the modelling and management of credit risk have rapidly increased and credit risk modelling has become an important topic in the field of finance and banking. While in the past most interests were in the assessments of the individual creditworthiness of an obligor, more recently there is a focus on modelling the risk inherent in the entire banking portfolio. This shift in focus is caused in greater part by the change in the regulatory environment of the banking industry. Banks need to retain part of the total capital as a buffer for unexpected losses on their credit portfolio. The level of capital that needs to be retained is determined by the central banks. In 2007 a new capital accord, the Basel II Capital Accord, became operative. This accord is the successor of the Basel I accord. The capital accords are named after the place where the Bank for International Settlements (BIS) is settled, namely Basel, Switzerland. The BIS gives recommendations concerning banks and other financial institutes on how to manage capital. The influence and reputation of the Basel