answers to this requirement and to make its own specific?
Preamble: the concepts of economic capital, regulatory capital and internal capital
Regulatory capital:
Regulatory capital is defined by the regulator and corresponds to the minimum capital required by the banking commission. The procedures for calculating regulatory capital are set out in the guidelines of Basel II. They are based in IRBA on two main data: the probability of default of the counterparty risk, and loss given default of the counterparty. ( Basel II Risk )
Economic capital:
Economic capital is the capital needed to cover a potential loss for a maximum level of confidence attached to a given horizon. It is defined by the bank according to an internal model and allows a better allocation of capital by business line.
The economic capital is used to cover exceptional losses. The expected losses are covered by the provisions, while the extreme losses are not covered.
The internal capital :
The internal capital to equity is necessary to cover all the risks identified by a bank. Its calculation is based on methods developed by each institution to take into account their specificities.
The concept of internal capital differs from that of economic capital on two points:
The purpose of the methods of calculation of economic capital is to assess the risks involved in the most close to the economic realities, through a sophisticated models, while the internal capital should only assess a risk by using methods more or less developed.
The internal capital must be included in the ICAAP.
The ICAAP (Internal Capital Adequacy Assessment Process) is a procedure to assess whether the funds are sufficient to cover all risks to which the banking institutions. The validation of the ICAAP by the banking commission is required for approval of a Basel II bank.
The ICAAP should describe the procedures to load and stress testing of various risks of a financial institution. The main risks that must inevitably be governed by the ICAAP are:
Credit risk
Market risk
Operational risk
Liquidity risk
Concentration risk
Residual risk
Securization risk
Business risk
Structural interest rate risk
The salaries of all types of risks identified must be described in the ICAAP. This procedure provides for stress tests in the following as a minimum:
A rise or fall in interest rates by 200 basis points
A decline in real estate 30%
Reminder fundamental pillar II
Pillar II formalizes the principles of governance of risk management. It ensures that banks better assess the adequacy of their capital with their risk profile. This objective is based on three points:
Optimize the monitoring of risks covered in Pillar I
Incorporate macroeconomic variables and the effects of economic cycles
Address the risks not taken into account in Pillar I
The method of economic capital to cover these additional risks
Economic capital to cover unexpected losses, or exceptional, all types of hazards addressed by the risk management of banks, including those who have not been taken into account in Pillar I of Basel II. These risks must be included in the calculation of regulatory capital to meet the requirements of Pillar II.
Economic capital is not constituted by the sum of the basic risks, it also includes the correlations between different assets, which reduces the overall cost of risk borne by a bank whose business portfolio is sufficiently diversified.
0 comments:
Post a Comment