8 Market risk This is the risk of a loss due to the day to day potential of an

8 market risk this is the risk of a loss due to the

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Market risk: This is the risk of a loss, due to the day to day potential of an investor to experience losses from fluctuations in securities prices. There are two methods to measure market risk, within the framework of Basle II. The Standardized Approach The Internal Models Approach Operational risk: According to the Basle committee, this is the risk of loss due to the inadequate or failed internal processes, people and system, or from external event. This can be summarized as everything that is not a result of credit and market risk. There are three approaches to measure operational risk. The Basic Indicator Approach (BIA) The Standardized Approach (TSA) The Advanced Measurement Approach (AMA) The AMA approach is the most sophisticated approach currently available. There are several methods within the AMA approach. One of them is the Loss Distribution Approach, which is also the main topic of this paper. An overview of the methods for risk management within the scope of the revised framework is shown is table 2. Pillar 1 Risk type Credit risk Market risk Operational risk Methods: Standardized Approach Standardized Approach Basic Indicator Approach Foundation Internal Rating Based Approach Internal Models Approach Standardized Approach Advanced Internal Rating Based Approach Advanced Measurement Approach Table 2. Impact of the Basle II, within Pillar 1. 1.3.2 Pillar 2- Supervisory Approach The second pillar of Basle II is the supervisory review process. The supervisory review process requires supervisors to ensure that each bank has sound internal processes in place to assess the adequacy of its capital based on a thorough evaluation of its risks. This framework encourage the bank’s management to develop an internal capital assessment process and setting targets for capital that commensurate with the bank’s particular risk profile and control environment. Supervisors are responsible for evaluating how well banks are assessing their capital adequacy needs relative to their risks. Internal processes of the bank would be subject to supervisory review and intervention. The role of the supervisors in Holland is fulfilled by “De Nederlandsche Bank”. 1.3.3 Pillar 3- Disclosure The third pillar of the new framework is disclosure, which sets a floor to support market discipline through enhanced disclosure by banks. The main idea is to ensure that market participants can get a better understanding of banks risks profiles and the adequacy of their capital position by effective disclosure. The new framework sets out disclosure requirements and recommendations in several areas, including the way a bank calculates its capital adequacy and its risk assessment methods. These requirements apply to all banks.
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