FINS T02B Recap - FINS 5550 / FINS 3650 International...

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FINS 5550 / FINS 3650 — International Banking Topic 2B Recap Remember, the lecture provides a structure for the suggested readings, and the recap you prepare after you have completed those readings. Presumably you have completed the work expected from you in respect of the first two lectures, in which case you will have read the Basel Capital Accord in its entirety and Basel II selectively. Your work in respect of the third lecture is to read the Basel III directive on capital, and to read Australian Prudential Standards 110 and 111, both available from APRA’s website at http://www.apra.gov.au . Previously, in the Topic 2A Recap — Bank Regulation, Risk, and Capital Basel Committee on Banking Supervision [ The Basel Committee on Banking Supervision (BCBS) was born of the failure of the Herrstatt Bank, which illustrated the interconnectedness of global banks. Basel Capital Accord The Basel Capital Accord of 1988 made capital its focus: Are the bank’s risky assets sufficient to repay the bank’s liabilities? Capital is the cushion — the shock absorber — that absorbs losses, thus preserves a bank’s solvency. Capital is to be held as a percentage of risk-weighted assets, which are calculated as face amount times risk- weighting times credit conversion factor. The Basel Capital Accord was amended in 1996 to include market risk, so that capital was to be held against the risk of losses in the trading book — losses which are not necessarily triggered by the bankruptcy of an obligor. (In other words, one can lose money on a bond even if the issuer is still able to repay the debt.) Basel II Basel II ’s two principal features were to make the risk-weighting of credit more aligned with credit risk, and to add more risks to the determination of capital adequacy. Basel II also separates the banks of the world into “standard” banks (which use off-the- shelf formulae for calculating risk-weighted assets) and “advanced” banks (which are allowed to use their own models). Pillar 1 — Minimum Capital Requirements requires all banks to hold capital not only against credit and market risk, but operational risk too. Pillar 2 — Supervisory Review Process discusses risks not included in Pillar 1, and how all risks are pulled together into a comprehensive capital requirement. Pillar 3 — Market Discipline adds another set of eyes in the form of the capital markets. Banks are required to publish their risk profiles, on the theory that banks with inadequate capital will be monitored by the market and “encouraged” to adjust. [Pull the latest Pillar 3 disclosure from the National Australia Bank website, and decide for yourself how effective a Pillar 3 statement is in disclosing the adequacy of capital.] [What was the principal concern of the 2009 Enhancements to the Basel II Framework , colloquially known as “Basel 2½”?]
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Topic 2 Recap FINS XX50 — International Banking 2 Topic 2B —Capital Management It is probably fair to say that the BCBS believes that the single most important aspect
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This note was uploaded on 09/19/2011 for the course FINS 3650 taught by Professor Arnold during the Three '11 term at University of New South Wales.

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FINS T02B Recap - FINS 5550 / FINS 3650 International...

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