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Economic capital allocation with Basel II: cost, benefit and implementation procedures

Author: Chorafas, Dimitris N. Series: Elsevier finance Publisher: Elsevier Butterworth-Heinemann, 2004.Language: EnglishDescription: 409 p. : Graphs/Ill. ; 24 cm.ISBN: 0750661828 ; 9780750661829Type of document: BookBibliography/Index: Includes index
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Item type Current location Collection Call number Status Date due Barcode Item holds
Book Europe Campus
Main Collection
Print HG1500 .C46 2004
(Browse shelf)
001228885
Available 001228885
Total holds: 0

Includes index

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Economic Capital Allocation with Basel II Cost, benefit and implementation procedures Contents Foreword Preface Warning: Basel II, the October 11, 2003, announcement and its aftermath 1 Introduction 2 Basel II implementation timetable 3 Changes affecting IRB, EL and UL 4 Bankers appreciate crisp definitions 5 Computation of unexpected losses 6 The home-host issue 7 A preview of Basel III Abbreviations Part 1: Commercial banks and the new regulation 1 Basel II, impact studies and cost of implementation 1.1 Introduction 1.2 The three pillars of Basel II 1.3 A bird's eye view of standardized, foundation IRB and advanced IRB methods 1.4 Quantitative impact studies and capital adequacy 1.5 Examples of the potential sophistication of A-IRB method 1.6 The cost of Basel II 1.7 Business risk and cost control 1.8 Is Basel III coming at the heels of Basel II? 2 Benefits from risk-based pricing and rating targets 2.1 Introduction 2.2 Risk-based pricing: a major benefit from Basel II 2.3 Targeting an 'AA' and `AA+' rating 2.4 How will Basel II affect credit institutions? 2.5 Benefits on the road from Basel I to Basel II 2.6 Basel II objectives and the effect of leverage 2.7 The need for a devil's advocate in risk management 2.8 A-IRB, Basel II and the German Savings Banks: a case study 2.9 Looking at the Sparkasse Luneburg project and its advantages xi xiii xvii xvii xvii xviii xx xxi xxiii xxiv xxvii 1 3 3 4 9 13 18 22 25 28 31 31 32 35 40 43 47 50 53 56 vi Contents 3 Regulatory capital defined 3.1 Introduction 3.2 The role of regulatory capital 3.3 Components of regulatory capital 3.4 Beyond Tier 1: the Tier 2 and Tier 3 regulatory capital 3.5 Pricing assets in Tier 1 and Tier 2 capital 3.6 Accounting for risks assumed with lending 3.7 Provisioning for bad loans under the new framework 4 Market discipline and its global impact 4.1 Introduction 4.2 Market discipline and enhanced financial disclosure 4.3 Qualitative and quantitative information in financial reporting 4.4 Credit ratings are a tool of market discipline 4.5 Important notions about risk grades and rating systems 4.6 Market discipline and management of default risk 4.7 Winners and losers with the new regime Part 2: The allocation of economic capital to business units 5 Economic capital defined 5.1 Introduction 5.2 A close look at economic capital 5.3 Emphasizing total economic equity 5.4 Economic capital, contingent assets and contingent liabilities 5.5 Economic capital and management accounting 5.6 Synergy between economic capital and risk management 5.7 Economic capital and the impact of default models 6 Economic capital and solvency management 6.1 Introduction 6.2 Practical examples with Basel II implementation 6.3 Economic capital and an institution's solvency 6.4 Solvency and the regulation of insurance companies 6.5 A practical look at position risk 6.6 Stress testing risk positions 7 Economic capital allocation: practical applications and theoretical background 7.1 Introduction 7.2 Role of the corporate center in economic capital allocation 7.3 Top-down and bottom-up identification of economic capital requirements 7.4 Economic capital allocation at Rabobank, Credit Suisse, Deutsche Bank and Citigroup 7.5 Citigroup's adjustment factor: an example with operational risk 61 61 63 66 71 74 79 81 84 84 86 89 92 96 99 102 105 107 107 108 112 115 118 120 123 127 127 129 132 138 141 144 149 149 151 155 158 162 Contents vii 7.6 Developing a theoretical framework for capital allocation 7.7 An algorithmic solution for unexpected losses by the Deutsche Bundesbank 8 Evolving rules and procedures for economic capital allocation 8.1 Introduction 8.2 Corporate focus on economic capital allocation 8.3 Real-life examples with economic capital allocation to business units and channels 8.4 First-order and second-order risks 8.5 Learning a lesson from physical sciences 8.6 The issue of procyclicality and its impact on economic capital 8.7 Banco de Espana: case study on an initiative against procyclicality 9 Strategies used by banks to increase their capital base 9.1 Introduction 9.2 The Modigliani-Miller hypothesis on equity vs debt 9.3 Leveraging increases significantly the probability of default 9.4 Economic capital increases should only be done in a responsible way 9.5 Diversification in the banking business is often wanting 9.6 Capital arbitrage through securitization 9.7 Statistics on securitized corporate debt and other instruments Part 3: Defaults, internal ratings and technological solutions 10 Default defined 10.1 Introduction 10.2 Default milestones 10.3 Definition of default point 10.4 Contribution of default point to credit risk strategy 10.5 Credit risk information can be painful news 10.6 Expected default frequency and the database 11 IRB, technological infrastructure, models and correlations 11.1 Introduction 11.2 IRB and the technology needed by credit institutions 11.3 Twenty-first century real-time and real-space in the banking industry 11.4 Requirements for efficient IRB modeling 11.5 Management must be careful with models and statistics 11.6 The calculation and evaluation of correlation coefficients 11.7 Are correlation coefficients reliable and well understood? 11.8 Beware of magnitude of risk with correlated exposures 12 Internal ratings, supervisory weights and collateral 12.1 Introduction 12.2 The volatility of capital reserves and Basel II 12.3 Meeting the prerequisites of layers of supervision 165 168 173 173 174 178 182 186 189 192 195 195 196 198 201 203 205 208 213 215 215 217 221 226 230 234 237 237 239 243 248 251 254 256 258 263 263 264 269 viii Contents 12.4 Problems and opportunities associated with risk weights 12.5 A case study with small and medium enterprises 12.6 Risk weights with standardized and IRB methods 12.7 The handling of collateral 12.8 Remargining of collateral, credit derivatives and special vehicles 13 Software which can help in IRB implementation 13.1 Introduction 13.2 Mapping the analysis of bankruptcy patterns 13.3 Marking-to-model the loans portfolio: RAROC and LAS 13.4 Moody's KMV family of models 13.5 Economic capital allocation by Moody's KMV portfolio manager 13.6 Sharpe ratio: its usage and misusage 13.7 Implementing the Best Capital Adequacy Ratio 13.8 Using BCAR as a step towards a comprehensive solution 14 How to be in charge of IRB 14.1 Introduction 14.2 The risk of misinterpretation of financial information 14.3 Management quality rating system by Goldman Sachs 14.4 Management's appreciation of unexpected losses 14.5 Legal risk in a global economy and bankruptcy laws 14.6 Longer-term liability and legal risk 14.7 Rating agencies, legal risk and other risks Part 4: Regulatory and political issues tend to be indivisible 15 Supervisory authorities and their regulatory policies 15.1 Introduction 15.2 Broader context of Basel II and its implementation 15.3 The need to expand the supervisors' power of action 15.4 Core Principles, the Financial Stability Forum and the Committee on the Global Financial System 15.5 Group of Seven, Group of Ten and Group of Twenty 15.6 Memoranda of Understanding concerning the offshores and bankruptcies 15.7 Globalization, the wealth of nations and the finance industry 16 Contrarians to Basel II, CAD 3 and 2010 challenges 16.1 Introduction 16.2 Dissent is an integral part of sound governance: the good news 16.3 Reservations about Basel II expressed by professional bodies 16.4 The Shadow Financial Regulatory Committee and its 'debt is king' proposal 16.5 The 27 February 2003 testimony to the US Congress Subcommittee 16.6 The eleventh hour is no time for constructive criticisms 272 275 279 282 285 290 290 291 294 298 303 304 307 309 314 314 316 319 322 326 329 332 337 339 339 341 345 347 350 353 355 361 361 362 366 369 371 374 Contents ix 16.7 If one does not want to be taken for fool, one should not say foolish things 16.8 Basel II and the EU's third Capital Adequacy Directive 16.9 The challenge of regulating globalized markets (Appendix: the Basel Committee on Banking Supervision and Basel II Acknowledgments Index 377 380 383 387 389 403

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