TEST CASES ELABORATION PROCESS

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TEST CASES ELABORATION PROCESS

Andrés Álvarez VázquezUniversity of Oviedo

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CALCULATION OF MINIMUM CAPITAL REQUIREMENTS

CREDIT RISK

The Standardised Approach(2 test cases)

The Internal Ratings-Based Approach (1 test case)

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REFERENCES

BANK FOR INTERNATIONAL SETTLEMENTSBASEL 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)

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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)

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COMMON PROBLEMS

Difficulties for non-specialist in banking operations

Information required: development of our own cases

For banks:* Data collection process* High costs

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THE STANDARDISED APPROACH

Credit risk measurement in a standardised manner, supported by external credit assessments

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Claims on sovereigns: OECD country risk classification

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OECD CREDIT RISK CLASSIFICATION

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Other exposures:

ECAIs risk classification (Standard & Poor’s)

Credit risk set in Directive

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Exposure Value -Value Adjustments and

Provisions= Exposure Net of Value

Adjustments and Provisions

THE STANDARDISED APPROACHFilling the templates

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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


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OUR TEST CASES: ON-BALANCE SHEET ITEMS

RISK WEIGHTED EXPOSURE AMOUNT CALCULATED AS A PERCENTAGE OF E*

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RISK WEIGHTS ACCORDING TO ANNEX VIII OF THE DIRECTIVE

CAPITAL REQUIREMENTS = 8% x RISK WEIGHTED EXPOSURE AMOUNT

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• SIMPLE CASES• PROBLEMS:

- CRM TECHNIQUES E*- OFF-BALANCE SHEET ITEMS

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LEGAL REFERENCES AND COMMENTS IN THE TEMPLATES

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THE IRB APPROACHFilling 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

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• CREATION OF OBLIGOR RATING SCALE

• SEVEN GRADES + ONE MORE FOR PAST-DUE (minimum number of grades)

OBLIGOR GRADE: risk category within a rating system’s obligor rating scale to which obligors are assigned


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• AVERAGE PD ASSIGNED TO THE OBLIGOR GRADE (minimum 0.03%)

• EXPOSURE WEIGHTED AVERAGE LGD 45%

• MATURITY VALUE (M) 2.5 YEARS

RISK WEIGHT

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LGD: 45% 45%Maturity

PD:1 0,03% 15,00% 4,00%2 1,00% 95,00% 45,00%3 2,50% 120,00% 60,00%4 4,00% 140,00% 65,00%5 6,00% 160,00% 70,00%6 10,00% 190,00% 90,00%7 15,00% 220,00% 100,00%

PAST-DUE 100,00% 550,00% 130,00%

OBLIGOR GRADE

2,5 years

Asset class: Corporate exposures

Other retail exposures

50Turnover (millions of €)

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LEGAL REFERENCES AND COMMENTS IN THE TEMPLATES (IRB Ref List):

Exposure weighted average LGD* (%)

Annex XII, Part 3, paragraph 14 e.ii)(DISCLOSURE REQUIREMENTS)

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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)

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TEST CASES ELABORATION PROCESS

INFORMATION REQUIRED

TEMPLATES REFERENCE LIST & COMMENTS

TEST CASES ELABORATION PROCESS

Documents

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