Features of IRB Approaches to Credit Risk
Transcript of Features of IRB Approaches to Credit Risk
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Features of IRB Approaches to Credit Risk
Overview of Basel II Framework
Dr. Jens Bruderhausen
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Agenda
❙ Introduction to Basel II: Three pillar approach ❙ Standard approach to credit risk ❙ Internal Ratings Based Approach ❙ Definition of a rating system ❙ Exposure classes ❙ Approval process ❙ CRM (brief) ❙ Qualitative Minimum Requirements
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THREE PILLAR APPROACH
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Basel II – The three pillars of the Revised Framework
Basel II (Stability of the financial market)
Market Risk • Standardized Approaches • Internal models
❙ Banking Supervisors´ Analyses of specific Risk Situation of a Single Bank; ❙ Holistic View of all Risks; ❙ Evaluation of the Risk Management
Additional Risks to include:
e.g. IRR Banking Book, Risk Concentrations,
Liquidity risk
Quantity / Regulators´ Perspective
Quality / Institutions´ Perspective
Transparency / Market Perspective
Credit Risk • Rivised Standard Approach (RSA)
• Inrenal rating Based Approach (IRBA)
Pillar I “Minimum Capital
Requirements”
Pillar II “Supervisory Review Process
of Capital Adequacy“
Promotion of Market Discipline by expandet
Disclosure of Infor- mations
Additional Informations about: e.g. capital, Risks, Risk
Management, Methods of Risk Quantification
Pillar III “Market Discipline”
Operational Risk • Standardized Approaches • Internal models
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Supervisory Review Process (SRP) Overview
SRP / Pillar 2
ICAAP Internal Capital Adequacy
Assessment Process
SREP Supervisory Review &
Evaluation Process
Compliance Pillar 1+3
Evaluation ICAAP
Evaluation Controls
Banks’ view of internal risk management
Increasing of dialogue between banks and supervisors
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Risk-bearing
capacity
Risk exposure
(= the maximum
losses of the bank)
≥
Risk-bearing capacity
AT 4.1 MaRisk: Basic rule for risk management
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Risk-bearing capacity
Regulatory Capital &
Capital Structure
Risk Preferences
Management Regime
Accounting Standards
Time Horizon
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Minimum Capital Requirements (Pillar 1)
Standard Approach Internal Approach
Market Risk Credit Risk Operational Risk
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Market Discipline (Pillar 3)
❙ Promotion of disclosure and transparency of banks‘ information ❙ Market participants will have access to insightful information on ❙ Scope of application ❙ Capital structure ❙ Capital adquacy ❙ Risk exposure and risk assessment
❙ Promotion of market discipline ❙ Evaluation of bank‘s risk management ❙ Reward adquate risk-return-relationship ❙ Leading to additional incentives for banks to effectively manage their risks
❙ Use of market mechanisms for banking supervision
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The Road to Basel II
Basel I
Rules based calculation of capital requirements for market price and credit risk Internal market price risk models
Basel II
Soundness and stability of the banking system Level playing field 3 pillar system Operational risk Internal Rating Models
Revisions of Basel II
Market risk framework Double default
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CREDIT RISK STANDARD APPROACH
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Overview – Measurement approaches for credit risk –
Credit Risk Standardised Approach (CRSA)
• based on external ratings (credit assessments from rating agencies, export credit agencies)
• risk weight categories defined by supervisory authorities
IRB-Approach (IRBA)
• based on internal ratings (bank determines the obligor‘s resp. claim’s individual risk parameters)
• risk weight functions defined by the supervisory authorities
• additional minimum requirements
Foundation IRB Approach
Advanced IRB Approach
certain collaterals recognised
all types of collaterals
limited recognition of collateral
Capital requirements
high implemen-tation efforts
System requirements
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Standardised Approach
❙ CRSA is based on external credit assessments ❙ Risk weights derived from external ratings
❙ Approval of external credit assessments institution (ECAI) by supervisor ❙ Nomination per exposure class to prevent cherry-picking ❙ Disclosure of chosen ECAI and ratio of risk weighted assets per ECAI
S & P AAA
to AA-
A+ to A-
BBB+ to
BBB-
BB+ to
BB-
B+ to B-
Worse than B-
Credit quality 1 2 3 4 5 6
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CRSA Capital Requirements
CRSA assessment basis X CRSA conversion factor = CRSA exposure value X CRSA risk weights = Risk-weighted CRSA exposure value X 8 % = Capital Requirement
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CRSA Exposure Classes
❙ Central governments ❙ Regional governments and local authorities ❙ Other public-sector entities ❙ Multilateral development banks ❙ International organisations ❙ Institutions ❙ Covered bonds issued by credit institutions ❙ Corporates ❙ Retail business ❙ Exposures secured by real estate property ❙ Exposures in the form of collective investment undertakings (CIU) ❙ Equity esposures ❙ Securitisation positions ❙ Other items ❙ Past due items
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CRSA Assessment Basis
On balance sheet items
Book value
Off balance sheet items
Book value of claims
Contingent claims
Derivative exposures
Basis of calculation
product specific
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CRSA Credit Conversion Factor
Credit quality
step
Central govern-ments
Institu-tions
Corpo-rates
Securiti-sations Retail
1 0 % 20 % 20 % 20 % 75 %
❙ Private
customers ❙ Small enter-prises
❙ Diversifi-cation
2 20 % 50 % 50 % 50 % 3 50 % 100 % 100 % 100 % 4 100 % 100 % 100 % 350 % 5 100 % 100 % 100 % 1250 % 6 100 % 100 % 100 % 1250 %
Unrated 100 % 100 % 100 % 1250 % or inspection
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CRSA Securitisation Provisions
❙ A CRSA securitisation transaction is any securitisation transaction whose securitised porfolio, measured in terms of assessment bases, consists mostly of.‘ ❙ Assessment base: CRSA / IRBA ❙ Mostly: > 50 % of secured loans
❙ Securitisation framework applies to CRSA and IRB ❙ Seperate exposure class: Securitisations ❙ Calculation of capital requirements ❙ Based on external ratings ❙ Different risk weights for CSRA and IRBA
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CRSA Capital Requirements for Securitisations
Assessment basis X Conversion factor X Risk weights = Risk-weighted exposure value X 8 % = Capital Requirement
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❙ Calculation of capital requirements :
❙ Conversion Factor: 100%, but for the undrawn portion of market disruption and liquidity facility 0%, 20% or 50% (factors will be revised as a consequence to the financial crisis)
❙ If a CRSA securitisation position has no external rating, you may apply a risk weight of 1250% or you may opt for a „look-through“-approach – precondition: the bank has sufficient current information about the securitised portfolio:
Capital requirements and parameters 4. Securitisation provisions – CRSA capital requirements
= x Risk weighted exposure value
Assessment basis Risk weight for securitisation (RWs)
IRBA-positions: see 2nd part of
this session (annex)
CRSA-positions: risk weights see next
page
Conversion factor x
exposure not rated
not rated
only worthwhile for „most senior“ tranches:
RWs = ∅ -RW of underlying assets X „risk concentration ratio* “
*depends on the nominal amount of junior or pari passu tranches !
loan 1
loan n loan 3
loan 2
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from 2012 on Treatment of resecuritisations: ❙ Complexity of resecuritisation structures was not fully considered by external rating
agencies ❙ High impact of correlation effects ❙ Resecuritisations can lead to portfolio diversification but: high systematic risks!
=> External ratings overestimate diversification effects and underestimate the systematic risk
Credit quality step 1 2 3 4 (for long-term assessments
only)
rest
CRSA-risk weight (without resecuritsiations)
20 % 50 % 100% 350 % 1250 %
CRSA-risk weight for resecuritsiations
40% 100% 225% 650% 1250%
Capital requirements and parameters 4. Securitisation provisions – CRSA risk weights
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Stufe 4: Positionswert x KSA-Risikogewicht x 8 % = Kapitalanforderung AMB Generali: 1.000 EUR x 20 % x 8 % = 16 EUR Dt.Telekom: 1.000 EUR x 100 % x 8 % = 80 EUR Air Canada: 1.000 EUR x 150 % x 8 % = 120 EUR
Stufe 1: Zuordnung zur KSA-Forderungsklasse: „Unternehmen“ Stufe 2: Zuordnung externes Rating zur Bonitätsstufe ❙ AMB Generali: S&P-Rating: AA à Bonitätsstufe : 1 ❙ Dt.Telekom: S&P-Rating: BBB+ à Bonitätsstufe : 3 ❙ Air Canada: S&P-Rating: B- à Bonitätsstufe : 5
Stufe 3: Bestimmung Risikogewicht gemäß aufsichtlicher Tabelle ❙ AMB Generali: Bonitätsstufe : 1 à KSA-Risikogewicht: 20 % ❙ Dt.Telekom: Bonitätsstufe : 3 à KSA-Risikogewicht : 100 % ❙ Air Canada: Bonitätsstufe : 5 à KSA-Risikogewicht : 150 %
Berechnungsbeispiel
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INTERNAL RATINGS BASED APPROACH
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Internal Ratings Based Approach
❙ Risk based calculation of capital requirements ❙ Depending on portfolio / risk appetite ❙ Sophistication of risk measurement reflect level of risk management ❙ Incentive to adopt more sophisticated approaches via reduced capital requirements
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Q & A
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