Topic 02 Selected Slides -- Banking Regulation and Capital Management

Topic 02 Selected Slides -- Banking Regulation and Capital Management

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FINS 3650 / 5550 ternational Banking International Banking emester 2 2011 Semester 2, 2011 Dr Bruce R Arnold ruce arnold@unsw edu au bruce.arnold@unsw.edu.au Re: FINSXX50 z3121234 [Topic]
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anking and Stability Banking and Stability Banks enjoy a licence to print money, taking deposits in a fractional-reserve banking system. But “a banking system ends up, at its core, promising ething it cannot deli er” something it cannot deliver”. hus the regulatory interest in maintaining stability: Thus the regulatory interest in maintaining stability: by minimising the likelihood that runs are triggered (prudential management and credit support), and inimising e damage if runs occur (lender of last minimising the damage if runs occur (lender of last resort).
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hift in Focus Shift in Focus Reserves Capital Liabilities ash Assets Liabilities Assets Cash e osits Deposits RWAs Equity
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asel Co ittee on Banking Su er ision Basel Committee on Banking Supervision Basel Capital Accord (1988) risk-weighted assets redit conversion factors credit conversion factors core ( 50%) and supplemental capital Amendment to incorporate market risks (1966) market risk in the trading book FX and commodities risk in both the trading and banking books
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osses and Capital Losses and Capital Loss Probability Distribution Pr oss obab ty st but o “Worst-Case” Loss Economic Capital “Uneconomic” Capital P (Failure)
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asel II Basel II International Convergence of Capital Measurement nd Capital Standards Revised Framework and Capital Standards A Revised Framework (2004) Pillar 1 — Minimum Capital Requirements credit, operational, and market risk Pillar 2 — Supervisory Review Process tting capital requirements setting capital requirements Pillar 3 — Market Discipline Enhancements to the Basel II Framework (2009)
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Topic 02 Selected Slides -- Banking Regulation and Capital Management

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