TEST CASES ELABORATION PROCESS Andrés Álvarez Vázquez University of Oviedo 1
CALCULATION OF MINIMUM CAPITAL REQUIREMENTS CREDIT RISK n n The Standardised Approach (2 test cases) The Internal Ratings-Based Approach (1 test case) 2
REFERENCES BANK FOR INTERNATIONAL SETTLEMENTS BASEL 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) 3
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) 4
COMMON PROBLEMS n n n Difficulties for non-specialist in banking operations Information required: development of our own cases For banks: * Data collection process * High costs 5
THE STANDARDISED APPROACH n Credit risk measurement in a standardised manner, supported by external credit assessments 6
THE STANDARDISED APPROACH Claims on sovereigns: OECD country risk classification 7
OECD CREDIT RISK CLASSIFICATION 8
THE STANDARDISED APPROACH Other exposures: ECAIs risk classification (Standard & Poor’s) Credit risk set in Directive 9
THE STANDARDISED APPROACH Filling the templates Exposure Value -Value Adjustments and Provisions = Exposure Net of Value Adjustments and Provisions 10
THE STANDARDISED APPROACH Filling the templates 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 11
THE STANDARDISED APPROACH Filling the templates OUR TEST CASES: ONBALANCE SHEET ITEMS RISK WEIGHTED EXPOSURE AMOUNT CALCULATED AS A PERCENTAGE OF E* 12
THE STANDARDISED APPROACH Filling the templates RISK WEIGHTS ACCORDING TO ANNEX VIII OF THE DIRECTIVE CAPITAL REQUIREMENTS = 8% x RISK WEIGHTED EXPOSURE AMOUNT 13
THE STANDARDISED APPROACH Filling the templates • • SIMPLE CASES PROBLEMS: - CRM TECHNIQUES E* - OFF-BALANCE SHEET ITEMS 14
THE STANDARDISED APPROACH Filling the templates LEGAL REFERENCES AND COMMENTS IN THE TEMPLATES 15
THE IRB APPROACH Filling 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 16
THE IRB APPROACH Filling the templates • • CREATION OF OBLIGOR RATING SCALE SEVEN GRADES + ONE MORE FOR PASTDUE (minimum number of grades) OBLIGOR GRADE: risk category within a rating system’s obligor rating scale to which obligors are assigned 17
THE IRB APPROACH Filling 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 18
THE IRB APPROACH Filling the templates 19
THE IRB APPROACH Filling 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) 20
THE IRB APPROACH Filling 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) 21
TEST CASES ELABORATION PROCESS n n INFORMATION REQUIRED TEMPLATES REFERENCE LIST & COMMENTS 22
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