Unformatted text preview: 3/13 Capital Adequacy Framework 41 IRB approach
IRB Risk components – PD, LGD, EAD,
Risk Retail – PD, LGD & EAD given by banks Differentiation between IRB – Advanced &
Only PD from Bank in IRB foundation.
In advanced approach Banks provide their own
PD, LGD, EAD.
PD, 02/23/13 Capital Adequacy Framework 42 General Market Capital charge
General Captures risk of loss arising from general changes in market interest rates / other market variables
The market risk positions subject to capital charge
(i) The risks pertaining to interest rate related instruments and equities in the
trading book; and
(ii) Foreign exchange risk (including open position in precious metals)
throughout the bank (both banking and trading books).
• Standardized Duration approach.
• Internal risk management models
RBI initially adopted Standardized approach and now in the process of moving to Internal RM Models.
02/23/13 Capital Adequacy Framework 43 Scope and coverage of capital charge for
Market Computing capital charges for interest rate related instruments in the trading book, equities in the trading book and foreign exchange risk (including gold and other precious metals) in both trading and banking books.
Trading book for the purpose of capital adequacy will include:
(i) Securities included under the Held for Trading category
(ii) Securities included under the Available for Sale category
(iii) Open gold position limits
(iv) Open foreign exchange position limits
(v) Trading positions in derivatives, and
(vi) Derivatives entered into for hedging trading book exposures. 02/23/13 Capital Adequacy Framework 44 Measurement of capital charge for Interest
Rate The capital charge for interest rate related instruments would apply to current market value of these items in bank's trading book. Since banks are required to maintain capital for market risks on an ongoing basis, they are required to mark to market their trading positions on a daily basis. The minimum capital requirement is expressed in terms of two separately calculated charges, (i) "specific risk" charge for each security, which is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer, both for short (short position is not allowed in India except in derivatives) and long
positions, and (ii) "general market risk“ long and short positions (which is not allowed in India except in derivatives) in different securities or instruments can be offset.
02/23/13 Capital Adequacy Framework 45 Computation of capital for Market Risk
1. Capital Funds: 105 1.Tier I
50 Total RWA
1.RWA for Credit n Operational Risk
2.RWA on Market Risk 3. Total CRAR 4. Minimum capital required to support credit and operational risk (1000*9%)
Tier 1 (@ 4.5% of 1000)
Tier 2 (@ 4.5% of 1000) 5. 02/23/13 1140
90 45 45
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- Spring '13
- Basel II, Capital requirement, Operational risk, capital adequacy framework