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NT_tema_8_English_1_ - M odule 8 Solvency Learning Goals...

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Module 8. Solvency Learning Goals: Understand the importance of solvency, from the point of view of the internal management of entities, regulation and supervision. To know how calculation of the solvency ratio has evolved, and the effects of risk management. To know how Deposit Guarantee Funds work, and about the reserve requirements. Context: You belong to the Bank of Spain supervisory team that oversees financial institution A. You must be able to carry out the appropriate calculation to determine the level of compliance with solvency (Basel I) and liquidity requirements set out by the regulatory body. You should be able to make recommendations to solve the problems found in your analysis. Format: Introduction. Banking risks Solvency ratio. o Basel I o Basel II o Introduction to Basel III Limits to the concentration of risk. Insolvency risk and country risk. Deposit Guarantee Funds. Legal reserve requirements Continuous assessment: Read the article and answer the questions.
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1. Introduction. Banking risks Solvency regulatory framework Credit institutions are subject to a very broad range of regulations, whose main aim is to guarantee their solvency. Guarantee or Solvency Ratio. Circular BE 5/1993 Limit to concentration risk. Circular BE 5/1993 Limit to the concentration of fixed assets. Circular BE 5/1993 Provisions for Insolvency and Country Risk. Circular BE 4/2004 Deposit Guarantee Fund. Spanish Royal Decree 2606/1996, dated 20th December 1996. Legal reserve requirements or minimal reserves. ECB Regulation 2818/98. Banking risks can be classified into: Organisational risks: Strategic, technological, competition, regulatory, fraud, operational……. Typical banking risks: o Credit risk: breach of the debtor's obligations. o Liquidity risk: credit requests or deposit withdrawals by customers. o Interest rate risk: the result of interest rate volatility and of the differences between average maturity of financing for active and passive operations o Exchange rate risk: owing to exchange rate fluctuations. o Market risk: derives from price volatility of instruments that make up the trading portfolio.
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2. Solvency ratio. The Basel Committee is an organisation founded in 1975 by the presidents of the Central Banks of the G10 Countries, consisting of the banking authorities of: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Holland, Sweden, Switzerland, the United Kingdom, Spain and the U.S. This organisation is named the Basel Committee on Banking Supervision, since it usually meets at the Bank for International Settlements in Basel, where its secretariat is permanently located. The principles that result from the committee's decisions apply not only in the countries that take part in the committee, but also in most other nations, regardless of their level of economic development.
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