英语基础教程ADVERBSCapitalAdequacy课件

1、Capital AdequacyBasel II Accords Proposed 2004, Implemented SoonThree PillarsMinimum capital requirements,New methodology for calculating required capital for credit risk. Charges for operational risk Supervisory review - regulators use more comprehensive tools for assessing risk. Market discipline

2、banks expected to increase reporting to financial markets.Basel AccordsUnder the Auspices of the Bank for International Settlements, the Basle Committee (which consists of the G-10 countries central bank governors), have agreed upon a scheme of regulation which will be applied to international banks

3、. (What is the BIS?)The key element of this scheme is a set of requirements relating a minimum amount of bank capital relative to a risk based measure of assets. Why capital?Capital: Tension between profits and riskThe equity multiplier magnifies the effect of profits on returns which gives bank own

4、ers an incentive to increase leverage.Bank capital absorbs losses before depositors or creditors absorb losses. So bank depositors and creditors prefer capital.Risky banks may pay higher interest rates so banks may internalize depositors preferences But regulators have adopted a preference toward ca

5、pital requirements institutionalized by Basel.Capital and Moral HazardConsider a bank with 0 capital, full financed with deposits of $100 (which for convenience pay 0 interest rate).Bank managers face two loan projects with differing payoff profiles. Which will the bank choose? Which is socially opt

6、imal?Prob. of Good OutcomeProb. of Bad OutcomeInterestRecovery%Project A(Risky).5.5.20Project B(Safe)10.05N/AExpected Payoffs to depositors and bankersThe safe project creates value in excess of customers demand for funds. The expected value of the risky project is just $60, less than what was put i

7、n the project.Assume that in the event of bankruptcy, depositors claim all remaining assets. The depositors have an expected payoff of 100 under the safe scheme and only 50 under the risky lending scheme. They prefer safety. Bankers payoffsUnder the safe scheme, the bankers will get a payoff of 5. U

8、nder the risky scheme the bankers will get an expected payoff of 10. They will prefer the destructive, risky scheme. Why?Bankers get upside pay-off of risky scheme but put downsize risk on depositors.Well capitalized banks?Compare with bank finance by 80% deposits and 20% equity.Under safe scheme, b

9、ank gets an expected payoff of 25 for a 25% ROE.Under risky scheme, the bank owners receives 40 back in a good outcome and 0 back in a bad outcome for an expected payoff of 20. Bank owners share the downside risk and avoid the risky scheme.Measures of Capital RiskChief measures are Tier 1 leverage r

10、atio and CAR (capital adequacy) ratio. CAMELS rating systemRecent rise in US capital ratios as wellFDIC Historical Banking Statistics/hsob/SelectRpt.asp?EntryTyp=10Rising Capitalization Ratios in Hong KongSource: CEIC/HKMACapital Adequacy RatioMain regulatory requirement of HK banks is the CAR: Capi

11、tal Adequacy Ratio. CAR isSince 1987, the Basel Accords imposed in HK and CAR .08. What is regulatory capital? How do you adjust for risk?Historical Capital Adequacy for HKSource: Types of CapitalTier 1 capital is thought to be more stable and more aligned with the concept of capital as the funds th

12、at owners have invested in the banks (i.e. equity capital, perpetual preferred stock and retained earnings)Tier 2 capital are funds that protect depositors but may be withdrawn (subordinated debt) or is already somewhat committed to other purposes (reserves).Measuring CapitalFor regulatory purposes,

13、 capital is divided into two tiers. Tier 1Common Stock at Par + SurplusUndivided Profits/Retained EarningsMinority InterestsTier 2Subordinated DebtGeneral Loan Reserves (LLA)Other Reserves (similar to undivided profits)Minus Intangible Assets, GoodwillRisk Adjusted AssetsLoans & securities are place

14、d in a number of buckets AjOn with associated risk weights based on the identity of the borrowerOff-balance sheet items are converted to credit equivalents with credit conversion factor, ccfk, based on type of item. AjOff = ccf1 Aj,1Off + .Aj = AjOn + AjOffRisk Adjusted Assets: w1A1 + w2A2 + w4A4Ris

15、k adjustment of assets:Standardized ApproachDifferent assets are differentiated into buckets which have different risk weights.Risk Bucket LoansRisk Weights1. Domestic Central Govt.0%2.Public Entities, Foreign Governments (OECD), Banking. 20%3.Secured Residential Lending. 50%4.Commercial and consume

16、r loans 100%TimelineBasel Accords signed in 1987 imposed risk-based capital requirementsBasel Market Risk Amendment in 1996.Impose market risk requirementProblems with Basel IRisk weights too broadDoes not account for new risk management techniques. Standardized ApproachBasel IIMeant for smaller, le

17、ss sophisticated banks. New risk weights (0%; 20%; 50%; 100%, 150%) used for assessing capital required based on credit rating and type of assets.Uses External Ratings (where available)Unrated (most SMEs) weighted at 100%35% weight for claims secured by Residential Mortgage100% weight for claims sec

18、ured by Commercial Mortgage Set of risk weights (ranging from 0 to 150%) for different types of assets with different credit ratings claims on SovereignPublic EntitiesMDBBanks Securities FirmsCorporatesResidential LendingCashRegulatory RetailOther AssetsPast DueCredit Conversion FactorsOff Balanced

19、SheetTypeccf1.Standby LOC, Guarantees, Securitization w/ Recourse100%2. LT Loan Commitments 50%3. Commercial LOC20%4. Finanical Derivatives (depends on type & maturity)0-15%5. ST Loan Commitments0%Market RiskBanks with significant trading activity (trading assets+liabilities 10% of total assets) mus

20、t have additional capital beyond 8% of credit risk adjusted assets.Banks should calculate VAR of foreign exchange and securities positions and allocate some capital equal to 8% of VAR. IRB ApproachInternal Ratings Based: Foundation Approach Banks examine lending and associated assets and calculate p

21、robability of default for loans. Regulators provide formulas for associated capital requirement. Only banks that can demonstrate competence can use IRB approachInternal Ratings Based: Advanced Approach Bank constructs own (supervisor approved) formulas to calculate. PD: probability of default, EAD:

22、exposure of bank to defaultLAD: Loss at default M: remaining maturityand uses these to determine required capital. Operations RiskLoss of funds through operating circumstances may be a source of risk for banks. Standardized Approach: Allocate capital to equal 15% of 3year lagged moving average of re

23、venues. Subject to regulatory approval, most sophisticated banks may design their own systems for operations risk. How much capital?Depends on risk appetite of the bank, regulatory requirements, maintaining a good debt rating, limits of internal growth, relative cost of debt and equity financing.Use

24、 statistical ratios to describe the risk appetite of banks.Capital and GrowthCapital adequacy limitations can act as brake on bank growth. Consider a bank that can achieve 10% growth on the asset side of its balance sheets and also can borrow freely to achieve that growth.An adequately capitalized bank must achieve 10% capital growth or fall below the adequacy standard. Achieving Capital GrowthReduce dividend payout ratiosEarn higher ROA to increase cash flow (may increase risk)Change mix of assets to those with smaller capital cha