In most of the bank's assets and liabilities management aims to manage interest rate risk on bank balance sheets and ensure that the interest rate risk inherent in the bank's business does not disturb the stability of bank earnings.
Source of bank income is reflected from the Net Interest Income is the difference between lending rate and interest rate funds. Current Value / Net Present Value of the NII is the main contributor of the goal to stabilize the NII can be said also to stabilize the business value (this description commonly used in America).
The emphasis of a bank on both goals often depends on accounting management conducted → whether the report reflects the bank's management primarily from income or value. Management accounting consists of a reporting structure based on financial information that reflects the way the business at the bank management. On the other hand reports as provided by law like the report Income statement and balance sheet must be in accordance with the standards and laws of national accounting standards. Management accounting, are often influenced by the standards of financial reporting where the bank stands.
The main risks that can occur in ALM are: interest rate in the banking book and liquidity risk.
Interest Risk in the Banking Book
Banking book market risk: the risk of losses faced by banks to changes in market prices as a result of the bank's business structure, such as: activity and accumulation fund loans.
Interest rates in the banking book: the risk of loss due to changes in interest rates, generally the result of the bank conducted business with commercial and retail customers.
Interest risk in the banking book are not tercover in detail on Basel II. But in July 2004, a month after the Basel Committee published the "International Convergence of Capital Measurement and Capital Standards: a Revised Framework", Basel Committee published the "Principles for the Management and Supervision of Interest Rate Risk".
Activities assets and liabilities management
ALM is not just to manage risk and stabilize the business value, but also:
- Maintaining the desired liquidity structure of the bank's business
- Other things that may affect the shape and structure of bank balance sheets
- Things that can affect the stability of income every time
There are many things that can cause it needs a balance between structure and form of a bank's balance sheet, where it is a lot to do with the problems caused by international banks that have a capital structure that is dominated by the currency of their country, but income and assets and the form of eye pasivanya Other money. This led to foreign exchange risk to the bank earnings.
ALM managers should be aware that:
- Balance of a commercial bank does not consist of assets and liabilities are stable (because there are deposits and new loans or maturing)
- Repricing assets and liabilities on the bank's balance sheet is not always contractual (often there is a significant time difference between the market price changes and changes in interest rates applied to customers)
- Almost no correlation between retail product and wholesale prices to assess the assets and liabilities (a lot of marketing issue, which affects the assessor retail product but does not affect wholesale products)
- Retail products often things that are not rational (retail customers often have the right to decide the contract in different conditions than the wholesale market)
Some of the reasons why commercial banks with a number of retail customers are more difficult to manage the form and structure of its balance sheet, such as:
- Commercial banks usually consider good relations with customers, not only based on just kontral → customer focused
- Features of retail products are often different from the wholesale products that are hard to sell products in the wholesale market or difficult to manage risks by using wholesale products
Tuesday, December 22, 2009
Thursday, December 17, 2009
The Nature Of Treasury Risk
Treasury Risk is defined as the risk of loss on the bank treasury activities that depend on the risk management function of the treasury itself. Generally include the role of treasury risk management such as interest rate risk in the banking book and liquidity risk.
In practice includes treasury functions of the bank's trading activities themselves, so it is excluded in the definition of treasury risk. At some banks trading activities divorced from financing activities and liquidity management. Treasury model is called the 'Corporate Treasury'.
Actual role of the Treasury (although if the treasury is not included in trading activity) depends on the business model does. Example: Treasury may also manage the risk as the exchange rate risk from subsidiaries abroad, both in the profit and loss and capital management.
So that the Treasury can manage the risks, but the discussion was:
- Interest rate risk in the banking book → form of market risk in the banking book of the most common
- Liquidity Risk
- Management of capital / Capital Management
In practice includes treasury functions of the bank's trading activities themselves, so it is excluded in the definition of treasury risk. At some banks trading activities divorced from financing activities and liquidity management. Treasury model is called the 'Corporate Treasury'.
Actual role of the Treasury (although if the treasury is not included in trading activity) depends on the business model does. Example: Treasury may also manage the risk as the exchange rate risk from subsidiaries abroad, both in the profit and loss and capital management.
So that the Treasury can manage the risks, but the discussion was:
- Interest rate risk in the banking book → form of market risk in the banking book of the most common
- Liquidity Risk
- Management of capital / Capital Management
Saturday, December 12, 2009
Mark to Market Process
Because the trade position is always changing all the time, it is important that the bank's senior management has clear procedures regarding the mark-to-market traders to monitor performance.
Mark-to-market is a daily process in which a department (which is independent from the traders), obtain and verify the market price for all instruments in the trading book. For markets where trading is done directly with the opposition, closing price obtained from brokers active in the market, independent of the bank and find out current market price.
Some prices can be obtained from the official fixing rates such as LIBOR is determined daily (by the British Bankers' Association in London). This rate is used as a reference for many derivatives contracts as well as historical analysis.
In addition to brokers and official fixing, closing rates for some instruments obtained from official exchanges. Example:
- The closing price of shares determined by the stock exchanges where the shares traded.
- Futures contracts and options for future trading at future exchanges around the world. Each stock's closing price of each set should be used to re-evaluate all positions. Futures contracts are traded for interest rates, foreign exchange, bonds, komodiri, energy and stock index.
Procedure mark-to-market procedure consists of finding and verifying the price and put it into the bank revaluation system. The system will calculate the value of each instrument to be recorded on the bank's balance sheet. Current replacement value is also called value because they reflect the value that will pay the bank if the bank intended to make transactions at current market prices. Often the system also calculates the current risk positions resulting from the instruments which were revalued, or can be produced by a system of its own risks.
Current value of a transaction is used for:
- The calculation of profit - and loss - by comparing current values against original values
- The calculation of counterparty credit risk - by analyzing the current values of all transactions with the same counterparty (see chapter 2)
- Calculation of collateral for OTC transactions - count the current value of the instrument which is used as collateral to ensure that collateral mencover exposures from counterparty
- Margin calls by future exchanges are based on current market value. 'Margin' is the same as collateral payments on OTC transactions
- Cash settlement instruments - the end of the market value is used to complete the transaction with the counterparty
Mark-to-market is a daily process in which a department (which is independent from the traders), obtain and verify the market price for all instruments in the trading book. For markets where trading is done directly with the opposition, closing price obtained from brokers active in the market, independent of the bank and find out current market price.
Some prices can be obtained from the official fixing rates such as LIBOR is determined daily (by the British Bankers' Association in London). This rate is used as a reference for many derivatives contracts as well as historical analysis.
In addition to brokers and official fixing, closing rates for some instruments obtained from official exchanges. Example:
- The closing price of shares determined by the stock exchanges where the shares traded.
- Futures contracts and options for future trading at future exchanges around the world. Each stock's closing price of each set should be used to re-evaluate all positions. Futures contracts are traded for interest rates, foreign exchange, bonds, komodiri, energy and stock index.
Procedure mark-to-market procedure consists of finding and verifying the price and put it into the bank revaluation system. The system will calculate the value of each instrument to be recorded on the bank's balance sheet. Current replacement value is also called value because they reflect the value that will pay the bank if the bank intended to make transactions at current market prices. Often the system also calculates the current risk positions resulting from the instruments which were revalued, or can be produced by a system of its own risks.
Current value of a transaction is used for:
- The calculation of profit - and loss - by comparing current values against original values
- The calculation of counterparty credit risk - by analyzing the current values of all transactions with the same counterparty (see chapter 2)
- Calculation of collateral for OTC transactions - count the current value of the instrument which is used as collateral to ensure that collateral mencover exposures from counterparty
- Margin calls by future exchanges are based on current market value. 'Margin' is the same as collateral payments on OTC transactions
- Cash settlement instruments - the end of the market value is used to complete the transaction with the counterparty
Monday, December 7, 2009
Option Pricing
Option pricing is based on the probability of an option will have value at maturity. The main key of the option value is:
- Compare the strike price with the current market price. If the same, diekspektasikan option has a chance to 50% diexercise, because there are equal chances whether the exchange rate or an increase on the due date
- Term time. The longer the period the higher the premium because the longer time required by the option to have value. The longer period of time → higher risk
- Market price volatility. The more volatile the market price of the higher premium.
Strike price and option period chosen by the buyer. Volatility is a statistical calculation can be obtained from the historical price movements. Since the history data is not always a good predictor for the future, the expected volatility using market rates. Bervaraisi depending Volatilitias maturity and described as a curve with the same period as the yield curve.
- Compare the strike price with the current market price. If the same, diekspektasikan option has a chance to 50% diexercise, because there are equal chances whether the exchange rate or an increase on the due date
- Term time. The longer the period the higher the premium because the longer time required by the option to have value. The longer period of time → higher risk
- Market price volatility. The more volatile the market price of the higher premium.
Strike price and option period chosen by the buyer. Volatility is a statistical calculation can be obtained from the historical price movements. Since the history data is not always a good predictor for the future, the expected volatility using market rates. Bervaraisi depending Volatilitias maturity and described as a curve with the same period as the yield curve.
Wednesday, December 2, 2009
Bonds, Equities, Commodities and Foreign Exchange
- Bonds, stocks, spot foreign exchange and commodity spot judged by the difference between the original value of the traded market price at the moment.
- Forward was created by adjusting the current spot rate with the corresponding forward margins. The average margin can be calculated by the following formula:
Forward margin = Spot x Interest Differential x Time / (Days in year x 100)
o Interest Differential is the absolute difference between the base currency with foreign currency
o Time is a period of time (in days)
o Days in year = 360
- Forward margin:
actively traded on the interbank market
have quoted the standard margin for the period as the yield curve
Margins for the period in addition to the standard is obtained by interpolation
Forward assessed by comparing the original margin of the current margin.
- Forward was created by adjusting the current spot rate with the corresponding forward margins. The average margin can be calculated by the following formula:
Forward margin = Spot x Interest Differential x Time / (Days in year x 100)
o Interest Differential is the absolute difference between the base currency with foreign currency
o Time is a period of time (in days)
o Days in year = 360
- Forward margin:
actively traded on the interbank market
have quoted the standard margin for the period as the yield curve
Margins for the period in addition to the standard is obtained by interpolation
Forward assessed by comparing the original margin of the current margin.
Thursday, November 26, 2009
Pricing
One important control is to ensure that the bank's trading positions assessed every day with the current market price → is called marking-to-market.
Yield Curve
- All financial instruments with future cash flow assessed by calculating the present value of cash flow that will be due on these instruments.
- Present value is calculated by discounting the future value using current interest → interest rates on the market are needed cash flow.
- To calculate the required market rate banks create a yield curve. Curve that is used by a trader is more complex and results from several instruments to ensure that the curve is consistent.
- Rate for a standard tempo jateuh (1, 2, 3, 6, 12 months and 2, 3, 5 years) can be observed from the curve but the rate for another time to enter rate is calculated by → perform interpolation.
- The value of products related to interest rates and all the products with cash flow in the future are sensitive to changes depending on the maturity curve and financial nature of the instrument.
- In practice, each of the major currencies have a number of yield curve that is used at the same time. The differences arise mainly from differences in the basic instrument used to create discrete points.
- The main type of interest rate-related yield curves are:
o Cash - this curve is used to re-assess their positions and fund loans. Point on the curve is determined by the standard maturity traded in the interbank market.
o Derivative - this curve is used to assess all types of derivatives, including options. Point on the curve is determined by a combination of instruments starting from the cash rate by a short maturity followed by a future contract. Finally, long term rates resulting from the swap rate for the standard trading period. The combination instrument is closely related to the basic instrument used to perform the derivatives risk hedger
o Bond - bond prices are assessed based on closing price on that day. However, some bonds are not actively traded or not traded every day. For the current bonds, closing price curve can be generated from the bond (bond curve). The curves are generated from a standard maturity traded in the government bond market. Bonds can be considered as a spread over government bonds (benchmark) when market prices are not available. This reflects differences oblogasi liquidity and credit standing of the issuer.
o Base - This curve was created to determine the price of instruments that are not actively traded on the interbank market, for example: rates set by central banks for discounting bills or the Base Rate in the UK. Curve generally shows a spread above or below the standard curve. Each point on the curve has the interest rate differential alone to mature on the standard curve.
Yield Curve
- All financial instruments with future cash flow assessed by calculating the present value of cash flow that will be due on these instruments.
- Present value is calculated by discounting the future value using current interest → interest rates on the market are needed cash flow.
- To calculate the required market rate banks create a yield curve. Curve that is used by a trader is more complex and results from several instruments to ensure that the curve is consistent.
- Rate for a standard tempo jateuh (1, 2, 3, 6, 12 months and 2, 3, 5 years) can be observed from the curve but the rate for another time to enter rate is calculated by → perform interpolation.
- The value of products related to interest rates and all the products with cash flow in the future are sensitive to changes depending on the maturity curve and financial nature of the instrument.
- In practice, each of the major currencies have a number of yield curve that is used at the same time. The differences arise mainly from differences in the basic instrument used to create discrete points.
- The main type of interest rate-related yield curves are:
o Cash - this curve is used to re-assess their positions and fund loans. Point on the curve is determined by the standard maturity traded in the interbank market.
o Derivative - this curve is used to assess all types of derivatives, including options. Point on the curve is determined by a combination of instruments starting from the cash rate by a short maturity followed by a future contract. Finally, long term rates resulting from the swap rate for the standard trading period. The combination instrument is closely related to the basic instrument used to perform the derivatives risk hedger
o Bond - bond prices are assessed based on closing price on that day. However, some bonds are not actively traded or not traded every day. For the current bonds, closing price curve can be generated from the bond (bond curve). The curves are generated from a standard maturity traded in the government bond market. Bonds can be considered as a spread over government bonds (benchmark) when market prices are not available. This reflects differences oblogasi liquidity and credit standing of the issuer.
o Base - This curve was created to determine the price of instruments that are not actively traded on the interbank market, for example: rates set by central banks for discounting bills or the Base Rate in the UK. Curve generally shows a spread above or below the standard curve. Each point on the curve has the interest rate differential alone to mature on the standard curve.
Saturday, November 21, 2009
Forward Rate Agreement (FRA) and Option Contract
FRA is the OTC derivatives that allow banks to take a position on the forward interest rates.
- The contract gives the right to borrow / lend funds at a fixed rate for a certain period begins at a later date.
- No exchange or the principal amount
- The maturity of the cash settlement is the difference between the rate of the contract with the LIBOR rate prevailing at the time.
FRA is the OTC version of the interest rate futures contracts and more flexible than the future. FRA raises interest rate risk
Option Contract
- Providing the right (but not the obligation) to customers to make transactions under the contracts at the agreed price → means that the transaction will not be executed if the rate is not attractive to the customer / buyer.
- The seller has the open-ended risk of the contract and receive a premium as compensation.
- Option can be made of all cash and derivative instruments, there is even the option to option.
- The main term to describe the option is:
o Call - a call option gives the buyer the right to buy the underlying instrument
o Put - put option gives the buyer the right to sell the underlying instrument
o Premium - the amount paid to the seller by the buyer
o Strike Price - the price where the transaction will be done
o Exercise - run the option buyer to enter into a contract
o Expiry date - last date which the option must be done
o American - option that can be done on every day until the due date
o European - that option can only be done on the due date
- Determination of option pricing is based on the possibility of the option is implemented. To calculate the value of the option, use the calculation of volatility. Volatility of prices is that market prices reflect market expectations of how much prices will move in both directions during the option period.
- Option risks inherent in the instrument basically happens when the option is. Option also has a volatility risk and interest rate risk because the date of execution occur in the future. Example: option on a bond have the same risk as the risk of bonds and the risk of changes in the volatility of the oblogasi.
- The contract gives the right to borrow / lend funds at a fixed rate for a certain period begins at a later date.
- No exchange or the principal amount
- The maturity of the cash settlement is the difference between the rate of the contract with the LIBOR rate prevailing at the time.
FRA is the OTC version of the interest rate futures contracts and more flexible than the future. FRA raises interest rate risk
Option Contract
- Providing the right (but not the obligation) to customers to make transactions under the contracts at the agreed price → means that the transaction will not be executed if the rate is not attractive to the customer / buyer.
- The seller has the open-ended risk of the contract and receive a premium as compensation.
- Option can be made of all cash and derivative instruments, there is even the option to option.
- The main term to describe the option is:
o Call - a call option gives the buyer the right to buy the underlying instrument
o Put - put option gives the buyer the right to sell the underlying instrument
o Premium - the amount paid to the seller by the buyer
o Strike Price - the price where the transaction will be done
o Exercise - run the option buyer to enter into a contract
o Expiry date - last date which the option must be done
o American - option that can be done on every day until the due date
o European - that option can only be done on the due date
- Determination of option pricing is based on the possibility of the option is implemented. To calculate the value of the option, use the calculation of volatility. Volatility of prices is that market prices reflect market expectations of how much prices will move in both directions during the option period.
- Option risks inherent in the instrument basically happens when the option is. Option also has a volatility risk and interest rate risk because the date of execution occur in the future. Example: option on a bond have the same risk as the risk of bonds and the risk of changes in the volatility of the oblogasi.
Monday, November 16, 2009
Interest Rate Swap and Currency Swap
Interest Rate Swaps are OTC derivatives that allow banks and borrowers to access long-term interest rates without having a long-term funds. The main barriers for banks to provide long-term funds is credit risk and liquidity needs, while many clients have long-term projects that require long-term pendanan with fixed rate. Interest rate swap is a solution because it allows both parties to swap interest rate swap without doing the amount of principal.
Interest rate swaps are traded to maturity 30 years (although only traded a little bit above 10 years). The maximum maturity depending on the currency and bond markets in the relevant currency, because the bonds used to hedge the swap.
Vanilla interest rate swap has a fix that was'swap 'on the floating rate index such as 1 month, 3 month or 6 month LIBOR → means that all parties agree to exchange the difference in these two interest rates. Because LIBOR rate changes every time the net exchange will differ from time to time.
Interbank market trading in the market especially vanilla swap but there are many variations to meet customer needs. Interest rate swap raises interest rate risk. Banks use various hedging instruments to manage interest rate risk.
Characteristics similar to interest rate swaps, except that the flow rate is in a different currency, for example: U.S. Dollar-euro interest flows to flows.
The main difference with the interest rate swap:
Interest Rate Swap
- No subject is transferred
- Raises the risk of interest rate
Currency Swap
- Essential in the transfer / on-the spot exchange rate
- Raises the risk of interest rates and exchange rates
Interest rate swaps are traded to maturity 30 years (although only traded a little bit above 10 years). The maximum maturity depending on the currency and bond markets in the relevant currency, because the bonds used to hedge the swap.
Vanilla interest rate swap has a fix that was'swap 'on the floating rate index such as 1 month, 3 month or 6 month LIBOR → means that all parties agree to exchange the difference in these two interest rates. Because LIBOR rate changes every time the net exchange will differ from time to time.
Interbank market trading in the market especially vanilla swap but there are many variations to meet customer needs. Interest rate swap raises interest rate risk. Banks use various hedging instruments to manage interest rate risk.
Characteristics similar to interest rate swaps, except that the flow rate is in a different currency, for example: U.S. Dollar-euro interest flows to flows.
The main difference with the interest rate swap:
Interest Rate Swap
- No subject is transferred
- Raises the risk of interest rate
Currency Swap
- Essential in the transfer / on-the spot exchange rate
- Raises the risk of interest rates and exchange rates
Wednesday, November 11, 2009
Derivative Instruments
Derivatives have become a major component of market risk for more than 20 years because banks continue to create innovative products to its customers. Previous products called "cash instruments" because it is the basic instrument for derivative products.
The main characteristic of the principal amount of derivatives transactions is not traded, thus reducing the credit risk and settlement risk. Derivatives are often called 'contracts for difference' because that is exchanged is a change from the cash price of the traded instrument. Because credit risk is reduced, then the banks can trade derivatives with a lot of cash compared to the instrument, so that makes markets more liquid and the resulting growth in trading volume and the amount of risk taken by banks.
Some derivatives are traded on futures exchanges and options traded on the over-the-counter (OTC) market. OTC market is a market where banks trade directly with each other and not through the stock.
One of the important derivatives are future contracts. These contracts are traded through exchanges which act as a clearinghouse for all parties. Therefore, banks do not have to deal with credit risk from many parties, but only with the stock alone. Future contracts are deals to be done on the basic instrument in the future. There are future contracts for most of the cash instruments ranging from bonds to commodities.
In general, future contract has the characteristics:
- Exchange traded → traded through the stock
- Value of fixed per-contract
- Date of delivery has been established
- Terms of delivery must be appropriate
- Daily margin calls
Future contract risk as instruments are essentially features and interest rate risk because the transaction date in the future.
The main characteristic of the principal amount of derivatives transactions is not traded, thus reducing the credit risk and settlement risk. Derivatives are often called 'contracts for difference' because that is exchanged is a change from the cash price of the traded instrument. Because credit risk is reduced, then the banks can trade derivatives with a lot of cash compared to the instrument, so that makes markets more liquid and the resulting growth in trading volume and the amount of risk taken by banks.
Some derivatives are traded on futures exchanges and options traded on the over-the-counter (OTC) market. OTC market is a market where banks trade directly with each other and not through the stock.
One of the important derivatives are future contracts. These contracts are traded through exchanges which act as a clearinghouse for all parties. Therefore, banks do not have to deal with credit risk from many parties, but only with the stock alone. Future contracts are deals to be done on the basic instrument in the future. There are future contracts for most of the cash instruments ranging from bonds to commodities.
In general, future contract has the characteristics:
- Exchange traded → traded through the stock
- Value of fixed per-contract
- Date of delivery has been established
- Terms of delivery must be appropriate
- Daily margin calls
Future contract risk as instruments are essentially features and interest rate risk because the transaction date in the future.
Friday, November 6, 2009
Trading Instrument - Cash Instruments
There are various instruments tiger trade, where products are instruments commonly traded internationally or called 'vanilla product', because they are a pure form. The main currencies traded was USD, EUR, JPY and GBP.
Cash instruments
Spot foreign exchange transactions
Spot transactions are foreign exchange transactions for the next 2 days or it is called date spot. 2-day period arising from interbank settlemen instructions to use the telegraph and the bank took 2 days to ensure that the instructions can be executed. The market for spot transactions is the most liquid market in the world. Transactions spot foreign exchange risk caused.
Forward foreign exchange transaction
Forward transactions are foreign exchange transactions on the date specified is longer than the spot date and not more than 1 year (but there are banks that transact more than 1 year) transaction Forward exchange rate and lead to interest rate risk, because of the forward rate is determined by the level of interest rates of two currencies, combined with the current spot rate.
Foreign exchange rate swap
Swap is a combination of spot and forward. The two parties conduct spot transactions in the spot rate and forward to the forward at the same rate to the principal amount and the same currency. The difference of the two rates reflects the difference between the interest rate of 2 currency transactions during that period. Raises interest rate swap risk.
Loans and deposits
Loans and deposits traded between banks (interbank money market) at a fixed rate for a certain period. Period of time varies from overnight to 5 years, but rarely deals with maturity> 1 year. Interest paid at maturity together with the payment of principal, unless the maturity> 1 year of interest payments made each year. Interbank money market used by banks to take positions in anticipation of interest rate movements. But many bank transactions due to the need to match the funding needed to maintain their liquidity positions. Loans and deposits lead to interest rate risk.
Bonds
Bonds are long-term debt that can dipindahtangan and published by the borrower (issuer) when receiving money from the investor (holder). Bond issuer must pay interest, usually in a regular, long term bonds and to pay principal at maturity.
'Vanilla' bond usually has a fixed interest rate called the 'coupon', which will dibayatkan on a predetermined date for a period of paid bonds and principal at maturity. The term vanilla is used to indicate bonds that have a standard feature. However, bonds may have financial incentives to attract investors vary.
Bond prices are influenced by interest rates and financial condition of the issuer. Rating agencies like Moody's and S & P yield grade which covers a broad credit risk from bonds, from AAA (issuer's ability to pay principal and interest is very strong) to D (there are arrears / default). Bond raises general interest rate risk and specific risk. Non-vanilla bonds will lead to other types of risks such as liquidity risk.
Equity trading
Equity trading is the buying and selling shares of a company on the stock exchanges around the world. Shareholders will receive a regular dividend, paid out of corporate profits and rising stock values. The stock price reflects the market perception of the value of the company and the value of the projection pendaptan. Stock prices if the market fluctuates to adjust the assessment of the company as a response to information received about the company. Position led to general equity shares risk and specific risk.
Commodity trading
Commodity trading is the buying and selling physical products that are traded on the secondary market. The products include: agricultural products, oil and precious metals. Products purchased and sold to be sent to a specified location on a predetermined date. There are spot and forward markets for many products and each product has additional features that are directly related to the physical nature of the product.
Examples of product-specific feature is the oil trade.
Besides crude oil, a product of refining crude oil traded on the market. Each product has its own market and price.
Location is very important to the buyer. Sebuat crude oil tankers in the U.S. has a different value to buyers in the USA than tankers in Malaysia due to differences in demand / supply balance in each State and the oil transportation costs between countries. .
Commodity position risk and caused commodity forward position raises interest
Cash instruments
Spot foreign exchange transactions
Spot transactions are foreign exchange transactions for the next 2 days or it is called date spot. 2-day period arising from interbank settlemen instructions to use the telegraph and the bank took 2 days to ensure that the instructions can be executed. The market for spot transactions is the most liquid market in the world. Transactions spot foreign exchange risk caused.
Forward foreign exchange transaction
Forward transactions are foreign exchange transactions on the date specified is longer than the spot date and not more than 1 year (but there are banks that transact more than 1 year) transaction Forward exchange rate and lead to interest rate risk, because of the forward rate is determined by the level of interest rates of two currencies, combined with the current spot rate.
Foreign exchange rate swap
Swap is a combination of spot and forward. The two parties conduct spot transactions in the spot rate and forward to the forward at the same rate to the principal amount and the same currency. The difference of the two rates reflects the difference between the interest rate of 2 currency transactions during that period. Raises interest rate swap risk.
Loans and deposits
Loans and deposits traded between banks (interbank money market) at a fixed rate for a certain period. Period of time varies from overnight to 5 years, but rarely deals with maturity> 1 year. Interest paid at maturity together with the payment of principal, unless the maturity> 1 year of interest payments made each year. Interbank money market used by banks to take positions in anticipation of interest rate movements. But many bank transactions due to the need to match the funding needed to maintain their liquidity positions. Loans and deposits lead to interest rate risk.
Bonds
Bonds are long-term debt that can dipindahtangan and published by the borrower (issuer) when receiving money from the investor (holder). Bond issuer must pay interest, usually in a regular, long term bonds and to pay principal at maturity.
'Vanilla' bond usually has a fixed interest rate called the 'coupon', which will dibayatkan on a predetermined date for a period of paid bonds and principal at maturity. The term vanilla is used to indicate bonds that have a standard feature. However, bonds may have financial incentives to attract investors vary.
Bond prices are influenced by interest rates and financial condition of the issuer. Rating agencies like Moody's and S & P yield grade which covers a broad credit risk from bonds, from AAA (issuer's ability to pay principal and interest is very strong) to D (there are arrears / default). Bond raises general interest rate risk and specific risk. Non-vanilla bonds will lead to other types of risks such as liquidity risk.
Equity trading
Equity trading is the buying and selling shares of a company on the stock exchanges around the world. Shareholders will receive a regular dividend, paid out of corporate profits and rising stock values. The stock price reflects the market perception of the value of the company and the value of the projection pendaptan. Stock prices if the market fluctuates to adjust the assessment of the company as a response to information received about the company. Position led to general equity shares risk and specific risk.
Commodity trading
Commodity trading is the buying and selling physical products that are traded on the secondary market. The products include: agricultural products, oil and precious metals. Products purchased and sold to be sent to a specified location on a predetermined date. There are spot and forward markets for many products and each product has additional features that are directly related to the physical nature of the product.
Examples of product-specific feature is the oil trade.
Besides crude oil, a product of refining crude oil traded on the market. Each product has its own market and price.
Location is very important to the buyer. Sebuat crude oil tankers in the U.S. has a different value to buyers in the USA than tankers in Malaysia due to differences in demand / supply balance in each State and the oil transportation costs between countries. .
Commodity position risk and caused commodity forward position raises interest
Tuesday, October 20, 2009
Product Development
Complex trading activities if:
- The market becomes more liquid and sophisticated
- Banks need to trade the portfolio of instruments more than the customer needs
This prompted the bank to expand its trading portfolio. In these circumstances is very important for banks to consider the control structure to ensure that they are able to manage the risks arising from such trading activity.
Because the bank supervisor procedure provides for freedom of new products, it is important to establish a bank banks granting permission procedures are strict in the entire department of the bank. Procedures for granting a permit must include the following:
- Provision granting permission - whether a bank has a license for a product?
- Impact on capital - how these products affect the capital requirements of banks?
- Taxes - the product will create new tax issues?
- Accounting procedures - whether the product can be accommodated by the bank's procedures?
- Legal procedures and documentation - whether the provisions of law have been met and approved the document?
- IT System-does trade and settlement systems need upgrades?
- Operations - whether the bank can booked and conduct accurate transaction settlement?
- Reporting of risk management - whether the system can find the bank's risk and risk positions melaporan generated by the product?
- Pricing and valuation - whether the procedure price and mark-to-market have been approved?
- The need for funding - whether the product a significant impact on bank funding needs?
- Implications for credit risk - whether the bank has sufficient credit lines to support the product?
- Procedure compliance - whether the product requires a new compliance procedures?
- The market becomes more liquid and sophisticated
- Banks need to trade the portfolio of instruments more than the customer needs
This prompted the bank to expand its trading portfolio. In these circumstances is very important for banks to consider the control structure to ensure that they are able to manage the risks arising from such trading activity.
Because the bank supervisor procedure provides for freedom of new products, it is important to establish a bank banks granting permission procedures are strict in the entire department of the bank. Procedures for granting a permit must include the following:
- Provision granting permission - whether a bank has a license for a product?
- Impact on capital - how these products affect the capital requirements of banks?
- Taxes - the product will create new tax issues?
- Accounting procedures - whether the product can be accommodated by the bank's procedures?
- Legal procedures and documentation - whether the provisions of law have been met and approved the document?
- IT System-does trade and settlement systems need upgrades?
- Operations - whether the bank can booked and conduct accurate transaction settlement?
- Reporting of risk management - whether the system can find the bank's risk and risk positions melaporan generated by the product?
- Pricing and valuation - whether the procedure price and mark-to-market have been approved?
- The need for funding - whether the product a significant impact on bank funding needs?
- Implications for credit risk - whether the bank has sufficient credit lines to support the product?
- Procedure compliance - whether the product requires a new compliance procedures?
Thursday, October 15, 2009
Position Management and Hedging
Market risk does not only occur in trading book but also in the banking book, because the position of the banking book valued exchange rate and the current commodity value. Management interest rates in the banking book is usually done by the Treasury.
Manajem market risk in banking book done by the Treasury the right to take a position until the limit set by the bank. This activity should be strictly controlled and independently to ensure knowing the risks.
Traders manage risk by trading in instruments that match their risk position. This method is not always profitable, so that frequently used hedging techniques. Traders can hedge their risk by taking the right position on the instrument being traded, or on different instruments. These instruments can have different characteristics but the change in market value will reflect the original transaction, so for all dihedge portfolio at the market price changes will result in little or no change in market value of the portfolio. Often a transaction must be some kind of hedge to match.
Trader will conduct hedge with a more liquid instrument of instruments that are traded so that they can perform faster hedgingnya strategy, dealing addition cost would be cheaper for a more liquid market.
The advantage of derivatives (hedging) from cash instruments (such as loans):
- Lower credit risk
- Lower funding needs
- A lower capital charge
- Greater liquidity
- Dealing a lower cost
However, hedging management requires a more careful because the instruments used are not the same as original transaction. There will be some residual risk that is not to be counted tercover and controlled. In a large trading positions, the interaction between hedge and long risk positions can create new risks.
Basis risk is the residual risk of the most significant and occurs in the portfolio with the same transaction. Basis risk is the risk of change in the relationship between the price at the position and price risk instruments used to hedge the risk position. This risk occurs in situations where the market price for each type of instrument has a different but interconnected.
Manajem market risk in banking book done by the Treasury the right to take a position until the limit set by the bank. This activity should be strictly controlled and independently to ensure knowing the risks.
Traders manage risk by trading in instruments that match their risk position. This method is not always profitable, so that frequently used hedging techniques. Traders can hedge their risk by taking the right position on the instrument being traded, or on different instruments. These instruments can have different characteristics but the change in market value will reflect the original transaction, so for all dihedge portfolio at the market price changes will result in little or no change in market value of the portfolio. Often a transaction must be some kind of hedge to match.
Trader will conduct hedge with a more liquid instrument of instruments that are traded so that they can perform faster hedgingnya strategy, dealing addition cost would be cheaper for a more liquid market.
The advantage of derivatives (hedging) from cash instruments (such as loans):
- Lower credit risk
- Lower funding needs
- A lower capital charge
- Greater liquidity
- Dealing a lower cost
However, hedging management requires a more careful because the instruments used are not the same as original transaction. There will be some residual risk that is not to be counted tercover and controlled. In a large trading positions, the interaction between hedge and long risk positions can create new risks.
Basis risk is the residual risk of the most significant and occurs in the portfolio with the same transaction. Basis risk is the risk of change in the relationship between the price at the position and price risk instruments used to hedge the risk position. This risk occurs in situations where the market price for each type of instrument has a different but interconnected.
Saturday, October 10, 2009
Development of Trading Activities
The purpose of a bank to buy and sell financial instruments is to obtain short-term profits from market price movements → means the bank at risk for loss if the value of financial instruments are down.
Banks may adopt one of three trading strategies:
1. Matched Book → lowest market risk
Bank to match the customer's position directly on the same amount and opposite positions are traded both internally and with other banks → terhadi at risk only when the deal with customers and transact offset (or is called 'hedging' or 'covering' transactions).
2. Manage product positioning by making appropriate hedging or covering from the trading desk policy.
Trading desk has a limit for market risk limit the risk that belongs to the bank every time. The position can be taken because the transaction because the customer or a trader to take positions in the market. This strategy allows the trader to calculate their position to take advantage of market price movements.
3. Being a 'market maker' for a product.
Traders will give buy and sell prices to customers and other banks and memperdagangkannya at the relevant price level. This strategy is running when the market is illiquid and other market makers with whom a trader can cover the risks. Market makers can benefit from:
→ spreads between buy and sell prices
→ market information obtained from each transaction
Risk in this strategy is that the trader must take a position that can cause harm. So traders have to be disciplined in managing risk and the bank should establish and monitor a suitable limit.
Banks tend to change its strategy if the business grows and there will be more than one strategy used in the product in a bank's trading book. Usually a bank trading activities arising from the desire to provide service to customers. As the development bank's trading activities in the forex market is one of the freely traded market in the world. This comes from the introduction of floating exchange rates in the 1970s, which created new risks for customers who do international business, so they asked the bank to do forex trading for them.
The exchange rate is a retail rate offered to customers including the wholesale margin of the interbank market rate. At the beginning of a very large margin trading, but as banks increase in volume and more confident in their ability to manage their foreign exchange positions, the trading activities of the service changes to be nasbah wholesale trading operation.
The banks with lots of customers and large volume of forex transactions can use the position of 'retail' is to influence short-term movements in the forex market, and can bring opportunity to profit far exceeds the customer's transaction. That's why banks to improve your position on his trading book. When competition increases, margins will drop to the customer, so the volume of trade for the world's major currencies such as USD / EUR, USD / JPY and EUR / GBP currently dominated by interbank trade, while trade is relatively small customer.
The development of foreign exchange is a good illustration of how trade an instrument to grow in a bank.
stage 1: the bank maintains a position of the instrument match the → the bank to do deal with customers and soon to hedge with another bank. Bank profit obtained from the difference between interbank rates and the price customers
stage 2: the bank holding the position of customer transactions, waiting for a short-term market movements are profitable banks. Holding period can be extended if the bank more experienced. Bank's trading activity does not depend anymore on customer activity
Banks may adopt one of three trading strategies:
1. Matched Book → lowest market risk
Bank to match the customer's position directly on the same amount and opposite positions are traded both internally and with other banks → terhadi at risk only when the deal with customers and transact offset (or is called 'hedging' or 'covering' transactions).
2. Manage product positioning by making appropriate hedging or covering from the trading desk policy.
Trading desk has a limit for market risk limit the risk that belongs to the bank every time. The position can be taken because the transaction because the customer or a trader to take positions in the market. This strategy allows the trader to calculate their position to take advantage of market price movements.
3. Being a 'market maker' for a product.
Traders will give buy and sell prices to customers and other banks and memperdagangkannya at the relevant price level. This strategy is running when the market is illiquid and other market makers with whom a trader can cover the risks. Market makers can benefit from:
→ spreads between buy and sell prices
→ market information obtained from each transaction
Risk in this strategy is that the trader must take a position that can cause harm. So traders have to be disciplined in managing risk and the bank should establish and monitor a suitable limit.
Banks tend to change its strategy if the business grows and there will be more than one strategy used in the product in a bank's trading book. Usually a bank trading activities arising from the desire to provide service to customers. As the development bank's trading activities in the forex market is one of the freely traded market in the world. This comes from the introduction of floating exchange rates in the 1970s, which created new risks for customers who do international business, so they asked the bank to do forex trading for them.
The exchange rate is a retail rate offered to customers including the wholesale margin of the interbank market rate. At the beginning of a very large margin trading, but as banks increase in volume and more confident in their ability to manage their foreign exchange positions, the trading activities of the service changes to be nasbah wholesale trading operation.
The banks with lots of customers and large volume of forex transactions can use the position of 'retail' is to influence short-term movements in the forex market, and can bring opportunity to profit far exceeds the customer's transaction. That's why banks to improve your position on his trading book. When competition increases, margins will drop to the customer, so the volume of trade for the world's major currencies such as USD / EUR, USD / JPY and EUR / GBP currently dominated by interbank trade, while trade is relatively small customer.
The development of foreign exchange is a good illustration of how trade an instrument to grow in a bank.
stage 1: the bank maintains a position of the instrument match the → the bank to do deal with customers and soon to hedge with another bank. Bank profit obtained from the difference between interbank rates and the price customers
stage 2: the bank holding the position of customer transactions, waiting for a short-term market movements are profitable banks. Holding period can be extended if the bank more experienced. Bank's trading activity does not depend anymore on customer activity
Monday, October 5, 2009
The Nature Of Market Risk
Market risk is the risk of loss of position on and off-balance sheet due to market price movements.
Banks that have a position on the balance sheet financial instruments exposed to market risk
Banks that act as an intermediary in a transaction that is not posted on the bank's balance sheet is not exposed to market risk on these transactions
Market risk consists of:
Specific Risk → risk of price movements of securities due to factors relating to the securities or issuernya. Example: the price of a bond falls due from the issuer credit rating deteriorated → affect the bond of the issuer but does not affect the bonds in general.
General Market Risk → risk of market price movements of the entire instrument. Example: reduction in central bank interest rates caused a decrease in market interest rates, which will affect the value of all instruments related to interest rates.
General market risk is divided into 4 major categories for analysis purposes:
- Interest rate risk → potential losses due to changes in interest rates, calculated on all instruments that use one or more yield curves to calculate a market value.
- Equity position risk → potential losses due to changes in stock prices, which applied to all instruments that use stock as part of the assessment.
- Foreign exchange risk → potential losses due to exchange rate movements. This risk applies to all products and position in the exchange rate has a different value of the exchange rate used by banks in reporting.
- Commodity position risk → potential losses due to commodity price changes, apply to all commodities and derivatives.
All of the above risk categories do not stand alone because of changes in the value of a risk will affect the types of other market risks.
There are other types of market prices associated with derivatives trading, such as volatility rates, which have the same risk profile as the above categories.
The market price is influenced by several factors namely:
- Supply and demand of a product will affect the price level in the short term because the market makers adjust prices to take advantage.
- Liquidity can affect the market price
Liquid market → there are a lot of market makers and high-volume business → small profit → dealing costs for small traders.
Illiquid market → bigger profits and trade less actively
Liquid markets may become illiquid before the holiday or any announcement relating to the economy.
- Intervention by the monetary authorities can affect the market price for quick short-term.
- Arbitrage (where a market price set by one or more other market prices), will affect the daily price movements.
- Political and economic events along with natural disasters can affect the market price for a dramatic short-term (both locally and internationally).
- Underlying economic factors are the strongest drivers of long-term market prices.
Banks that have a position on the balance sheet financial instruments exposed to market risk
Banks that act as an intermediary in a transaction that is not posted on the bank's balance sheet is not exposed to market risk on these transactions
Market risk consists of:
Specific Risk → risk of price movements of securities due to factors relating to the securities or issuernya. Example: the price of a bond falls due from the issuer credit rating deteriorated → affect the bond of the issuer but does not affect the bonds in general.
General Market Risk → risk of market price movements of the entire instrument. Example: reduction in central bank interest rates caused a decrease in market interest rates, which will affect the value of all instruments related to interest rates.
General market risk is divided into 4 major categories for analysis purposes:
- Interest rate risk → potential losses due to changes in interest rates, calculated on all instruments that use one or more yield curves to calculate a market value.
- Equity position risk → potential losses due to changes in stock prices, which applied to all instruments that use stock as part of the assessment.
- Foreign exchange risk → potential losses due to exchange rate movements. This risk applies to all products and position in the exchange rate has a different value of the exchange rate used by banks in reporting.
- Commodity position risk → potential losses due to commodity price changes, apply to all commodities and derivatives.
All of the above risk categories do not stand alone because of changes in the value of a risk will affect the types of other market risks.
There are other types of market prices associated with derivatives trading, such as volatility rates, which have the same risk profile as the above categories.
The market price is influenced by several factors namely:
- Supply and demand of a product will affect the price level in the short term because the market makers adjust prices to take advantage.
- Liquidity can affect the market price
Liquid market → there are a lot of market makers and high-volume business → small profit → dealing costs for small traders.
Illiquid market → bigger profits and trade less actively
Liquid markets may become illiquid before the holiday or any announcement relating to the economy.
- Intervention by the monetary authorities can affect the market price for quick short-term.
- Arbitrage (where a market price set by one or more other market prices), will affect the daily price movements.
- Political and economic events along with natural disasters can affect the market price for a dramatic short-term (both locally and internationally).
- Underlying economic factors are the strongest drivers of long-term market prices.
Tuesday, September 29, 2009
Minimum And Actual Capital
In fact, many banks have the capital to RWA ratio in excess of provisions.
Reasons for 'excess' capital
- Capital ratio is the ratio of bank capital in which at least should not be below it. Therefore, bank management chose to keep the ratio of capital to RWA was above the minimum conditions set by the supervisor.
- In some countries like America and England, bank supervisors to set capital ratio of RWA to a specific bank. In practice this ratio over the provisions of Basel.
- Many big banks have a world of their own internal risk models, which connect the level of capital requirements for the level of risk undertaken by banks in the business portfolio. Banks then adjust their capital. Model 'Economic capital' will result in greater capital requirements than Basel II. Banks that use this model are required to disclose it in accordance with Basel II, Pillar 2.
- Basel II and economic capital of a bank's model linking a bank's capital with the level and structure of the business. Banks are commercial enterprises and management plans for both organic growth and through acquisitions, require large capital to support the bank's growth plans.
- Access to capital markets can not always be ascertained, especially in terms of cost, because it is common for banks that plan to grow to ensure that: 1) they will not be hindered by a lack of capital; 2) the benefits of their plans will not be influenced by the high cost of capital as a result of factors such as short-term market to compete with government bonds.
Reasons for 'excess' capital
- Capital ratio is the ratio of bank capital in which at least should not be below it. Therefore, bank management chose to keep the ratio of capital to RWA was above the minimum conditions set by the supervisor.
- In some countries like America and England, bank supervisors to set capital ratio of RWA to a specific bank. In practice this ratio over the provisions of Basel.
- Many big banks have a world of their own internal risk models, which connect the level of capital requirements for the level of risk undertaken by banks in the business portfolio. Banks then adjust their capital. Model 'Economic capital' will result in greater capital requirements than Basel II. Banks that use this model are required to disclose it in accordance with Basel II, Pillar 2.
- Basel II and economic capital of a bank's model linking a bank's capital with the level and structure of the business. Banks are commercial enterprises and management plans for both organic growth and through acquisitions, require large capital to support the bank's growth plans.
- Access to capital markets can not always be ascertained, especially in terms of cost, because it is common for banks that plan to grow to ensure that: 1) they will not be hindered by a lack of capital; 2) the benefits of their plans will not be influenced by the high cost of capital as a result of factors such as short-term market to compete with government bonds.
Thursday, September 24, 2009
Basel II And Capital Adequacy
Capital adequacy of Basel II is a minimum of 8% (same as Basel I), because the Committee believed that the target capital ratio of 8% for international banks are still appropriate. Because each bank to calculate capital needs are different, the actual amount will differ from the provisions of the Basel capital I.
The purpose of Basel II is to make a regulation more in line with the risk profile of each bank. 2 Committee has adopted a transition plan to ensure that Basel II will not reduce the capital requirements of a bank or the banking industry too quickly.
1. Adany multiplier to ensure that the target of a minimum capital ratio of 8% to stay awake. 'Scaling factor' will be applied uniformly to all banks using the IRB approach for credit risk or the Advanced Measurement Approach for operational risk. QIS 3 in accordance with these factors will initially set at 106%.
2. Bank supervisors may prohibit a bank to lower the capital, but the decline in bank capital should be done gradually and approved by the bank supervisors from the year 2005 - 2008
The purpose of Basel II is to make a regulation more in line with the risk profile of each bank. 2 Committee has adopted a transition plan to ensure that Basel II will not reduce the capital requirements of a bank or the banking industry too quickly.
1. Adany multiplier to ensure that the target of a minimum capital ratio of 8% to stay awake. 'Scaling factor' will be applied uniformly to all banks using the IRB approach for credit risk or the Advanced Measurement Approach for operational risk. QIS 3 in accordance with these factors will initially set at 106%.
2. Bank supervisors may prohibit a bank to lower the capital, but the decline in bank capital should be done gradually and approved by the bank supervisors from the year 2005 - 2008
Saturday, September 19, 2009
Basel II And Risk Sensitivity
Breadth of Coverage
The biggest change in the extent of risk in Basel II tercover are additional operational risks. Various types of risks included in operational risk are:
transaction, execution, Business Interruption, settlement and fiduciary risks
People, poor management and inadequate supervision risks
Criminal, fraud, theft and rogue trader risks
Relationship and customer risks
Fixed cost structures, lack of resources, technology and physical assets, risks
Compliance and legal / regulatory risks
Information risk
Basel II also makes the Pillar 2 and 3 as an inseparable part of the process of determining a bank's capital ratio. Pillar 2 in bank supervisors are expected to introduce other risks faced by the possibility of a bank.
Definition of operational risk in Basel II is not comprehensive, because in reality there are significant risks that are not included are: business risk, strategic risk and reputation risk.
Depth of Coverage
Besides the broad range of risk, the Basel II risk dicover also more depth, particularly in credit risk.
Basel I
weight risk is very simple to use depending on the type of asset and the borrower (associated with country risk and the types of institutions or OECD Non-OECD.
Basel II:
weighting of risk that are used based on the quality of the debtor, and is supported by term loans and guarantees quality
allows the use of two approaches to determine the risk weighting of assets (RWA), namely:
- The Standardized Approach (change from 'grid' approach used in the Basel I → See 'Current Exposure Method and The Original Exposure Method in Chapter 2
- The Internal Rating-Based Approach
In this approach, the bank developed a grading of internal models to determine the creditworthiness of the debtor.
Both approaches have much in common with the way agencies do grading on the issuance of bonds. But the criticisms of Basel I as at least grade of credit risk, where this is in contrast with many of the grade range used by the agency.
If the bank chose IRB approach, the number of grade determined by the bank itself (but the bank supervisors have wanted at least 8 grade).
When used Standardized approach, the 'grid' of risk weight calculation in accordance with Basel I. This approach allows the grouping of inter-grade risk weight, but with the difference between the different assets, as Basel I.
The biggest change in the extent of risk in Basel II tercover are additional operational risks. Various types of risks included in operational risk are:
transaction, execution, Business Interruption, settlement and fiduciary risks
People, poor management and inadequate supervision risks
Criminal, fraud, theft and rogue trader risks
Relationship and customer risks
Fixed cost structures, lack of resources, technology and physical assets, risks
Compliance and legal / regulatory risks
Information risk
Basel II also makes the Pillar 2 and 3 as an inseparable part of the process of determining a bank's capital ratio. Pillar 2 in bank supervisors are expected to introduce other risks faced by the possibility of a bank.
Definition of operational risk in Basel II is not comprehensive, because in reality there are significant risks that are not included are: business risk, strategic risk and reputation risk.
Depth of Coverage
Besides the broad range of risk, the Basel II risk dicover also more depth, particularly in credit risk.
Basel I
weight risk is very simple to use depending on the type of asset and the borrower (associated with country risk and the types of institutions or OECD Non-OECD.
Basel II:
weighting of risk that are used based on the quality of the debtor, and is supported by term loans and guarantees quality
allows the use of two approaches to determine the risk weighting of assets (RWA), namely:
- The Standardized Approach (change from 'grid' approach used in the Basel I → See 'Current Exposure Method and The Original Exposure Method in Chapter 2
- The Internal Rating-Based Approach
In this approach, the bank developed a grading of internal models to determine the creditworthiness of the debtor.
Both approaches have much in common with the way agencies do grading on the issuance of bonds. But the criticisms of Basel I as at least grade of credit risk, where this is in contrast with many of the grade range used by the agency.
If the bank chose IRB approach, the number of grade determined by the bank itself (but the bank supervisors have wanted at least 8 grade).
When used Standardized approach, the 'grid' of risk weight calculation in accordance with Basel I. This approach allows the grouping of inter-grade risk weight, but with the difference between the different assets, as Basel I.
Monday, September 14, 2009
Development Of The Basel II Accord
Using the Consultative Committee approach to ensure that the new regulations have a positive impact. Committee issued a Consultative papers and followed by a period for consultation and revision.
Consultation period consists of a series of Quantitative Impact Studies (QIS), which some banks estimate the impact of the implementation of Basel II on the basis of the Consultative paper issued. Consultative papers and QIS has publish are:
Consultative Paper no. 1 - June 1999
QIS No. 1 - Q3/2000
Consultative Paper no. 2 - January 2001
QIS No. 2 - Q2/2001
QIS No. 2.5 - Q4/2001
QIS No. 3 - Q4/2002
Consultative Paper no. 3 - April 2003
The results of this paper is the issuance of the Basel II Accord in June 2004.
Some analysis on the QIS 3 is based on estimates because of the lack of data, so that in 2004 and 2005 several member countries of the Basel Committee issued a 'national impact study'. In Q4 2004 Committee mengelurkan materials and guidance for local bank supervisors as the basis of 'national impact study' them → study was finally called QIS 4 and run by bank supervisors in the USA and Germany.
Consultative approach used by the Basel Committee Committee based on the desire to not change the total capital of the banking industry.
Consultation period consists of a series of Quantitative Impact Studies (QIS), which some banks estimate the impact of the implementation of Basel II on the basis of the Consultative paper issued. Consultative papers and QIS has publish are:
Consultative Paper no. 1 - June 1999
QIS No. 1 - Q3/2000
Consultative Paper no. 2 - January 2001
QIS No. 2 - Q2/2001
QIS No. 2.5 - Q4/2001
QIS No. 3 - Q4/2002
Consultative Paper no. 3 - April 2003
The results of this paper is the issuance of the Basel II Accord in June 2004.
Some analysis on the QIS 3 is based on estimates because of the lack of data, so that in 2004 and 2005 several member countries of the Basel Committee issued a 'national impact study'. In Q4 2004 Committee mengelurkan materials and guidance for local bank supervisors as the basis of 'national impact study' them → study was finally called QIS 4 and run by bank supervisors in the USA and Germany.
Consultative approach used by the Basel Committee Committee based on the desire to not change the total capital of the banking industry.
Wednesday, September 9, 2009
Reason For The Development Of Basel II
Credit models - grading or options - based
The increasing use of quantitative methods by banks to calculate and report credit risk in their asset portfolios at the peak publicated Market Risk Amendment, which allows banks to use internal models to calculate the credit risk.
The development of this quantitative method provides a strong foundation for Basel II. Two problems that must be resolved before the Committee, Basel II can process.
Determining the type of 'credit model' will be allowed on Pillar 1. Committee to consider 2 alternatives:
'Full portfolio model' is a technique → option pricing model was developed by Robert Merton in determining prices and calculate the portfolio option.
'grading models' in which risk calculations are based on 'individual obligor base' and portfolio risk is the total of these individual risk → model was also used by rating agencies like S & P and Moody's. It should be noted that the Basel II uses the term 'grades' and not 'rated' even if it means the same.
At the end of the 1990 Committee decided to use a 'credit grading models'. However, there is a trend in the banking sector to use these 2 techniques together.
The extent to which quantitative techniques can be used to cover 'other risks' particularly operational risk. There are some arguments whether these risks should be included in Pillar 2 because very few banks that use quantitative calculations to compute and manage these risks. Concern of bank supervisors that the risk is very significant and if only depend on Pillar 2 will cause 'under capitalization' or 'inconsistent capitalization' of risk.
As a result Committee decided:
Include operational risk as a quantitative calculation of Pillar 1
Defining the broader operational risk but not including the risk of reputation, business and strategic.
Credit risk models in Pillar 1 is 'credit grading techniques'.
The increasing use of quantitative methods by banks to calculate and report credit risk in their asset portfolios at the peak publicated Market Risk Amendment, which allows banks to use internal models to calculate the credit risk.
The development of this quantitative method provides a strong foundation for Basel II. Two problems that must be resolved before the Committee, Basel II can process.
Determining the type of 'credit model' will be allowed on Pillar 1. Committee to consider 2 alternatives:
'Full portfolio model' is a technique → option pricing model was developed by Robert Merton in determining prices and calculate the portfolio option.
'grading models' in which risk calculations are based on 'individual obligor base' and portfolio risk is the total of these individual risk → model was also used by rating agencies like S & P and Moody's. It should be noted that the Basel II uses the term 'grades' and not 'rated' even if it means the same.
At the end of the 1990 Committee decided to use a 'credit grading models'. However, there is a trend in the banking sector to use these 2 techniques together.
The extent to which quantitative techniques can be used to cover 'other risks' particularly operational risk. There are some arguments whether these risks should be included in Pillar 2 because very few banks that use quantitative calculations to compute and manage these risks. Concern of bank supervisors that the risk is very significant and if only depend on Pillar 2 will cause 'under capitalization' or 'inconsistent capitalization' of risk.
As a result Committee decided:
Include operational risk as a quantitative calculation of Pillar 1
Defining the broader operational risk but not including the risk of reputation, business and strategic.
Credit risk models in Pillar 1 is 'credit grading techniques'.
Friday, September 4, 2009
The Three Pillars Of Regulation
Basel II is more complex than Basel I due to:
1. covers an area larger risks;
2. introduced three-tier approach;
using more complex methods of calculating risk.
Basel I → risk of credit and market risk (through the 1996 Market Risk Amendment).
Basel II operational risk → + + 'other risk' to calculate risk-based capital of a bank → (Basel II covers credit, market and operational risk).
Basel II also connects the capital of a bank directly with the risks run by banks
Basel II framework of three concepts developed through regulations known as the Three Pillars are:
Pillar 1 - minimum capital requirement is the development of standardized rules introduced in Basel I.
Pillar 2 - supervisory review of capital adequacy and internal assessment process
Pillar 3 - the implementation of 'market discipline' in an effort to strengthen transparency and encourage safe banking practices (safe) and healthy (sound).
Pillar 1 - Minimum Capital Requirement
Within Pillar 1, banks are required to calculate the minimum capital for credit risk, market risk and operational risk (development of the Basel I). For 'traded market risk' there is no change from the Market Risk Amendment in 1996. Interest rate risk in the banking book are not tercover in Pillar 1.
Pillar 2 - Supervisory Review
Pillar 2 is intended to formalize the practice of supervision by bank supervisors today. The concept of Pillar 2 have been found on the Basel I, and is intended to determine the minimum standards that can be applied according to the bank-by-bank basis. 'Supervisory Review' on Pillar 2 applied the same as that of the Federal Reserve Board (USA) and the Financial Services Authority (UK).
Supervisory reviews arranged to focus on:
Each above the minimum capital requirement according to Pillar 1 level, and
Initial actions needed to overcome the risks that will arise.
Pillar 2 also covers review of the interest rate in the banking book. Basel Committee paper "Principles for the Management and Supervision of Interest Rate Risk" which was published in July 2004 containing details of how to manage interest rate risk in the trading book.
Pillar 3 - Disclosure
Pillar Pillar 3 is about market discipline. The Bank for International Settlements (BIS) defines market discipline as a good corporate governance mechanisms of internal and external to the free market economy without government interference.
Pillar 3 is structured to:
1. help bank shareholders and market analysts;
2. increase transparency on issues such as:
Bank asset portfolios, and
The bank's risk profile
Basel I only includes Pillar 1. In practice Pillar 2 and 3 will be found in all countries, although different approaches and their application far.
Risk Coverage - credit, market, operational and other risks
Basel Committee Pillar 1 focuses on credit risk and operational while the Market Risk Amendment does not change. Pillar 1 marked the first time by dicover operational risk quantitative approach. In addition, the Basel Committee to cover 'other risks' on Pillar 2 and 3.
1. covers an area larger risks;
2. introduced three-tier approach;
using more complex methods of calculating risk.
Basel I → risk of credit and market risk (through the 1996 Market Risk Amendment).
Basel II operational risk → + + 'other risk' to calculate risk-based capital of a bank → (Basel II covers credit, market and operational risk).
Basel II also connects the capital of a bank directly with the risks run by banks
Basel II framework of three concepts developed through regulations known as the Three Pillars are:
Pillar 1 - minimum capital requirement is the development of standardized rules introduced in Basel I.
Pillar 2 - supervisory review of capital adequacy and internal assessment process
Pillar 3 - the implementation of 'market discipline' in an effort to strengthen transparency and encourage safe banking practices (safe) and healthy (sound).
Pillar 1 - Minimum Capital Requirement
Within Pillar 1, banks are required to calculate the minimum capital for credit risk, market risk and operational risk (development of the Basel I). For 'traded market risk' there is no change from the Market Risk Amendment in 1996. Interest rate risk in the banking book are not tercover in Pillar 1.
Pillar 2 - Supervisory Review
Pillar 2 is intended to formalize the practice of supervision by bank supervisors today. The concept of Pillar 2 have been found on the Basel I, and is intended to determine the minimum standards that can be applied according to the bank-by-bank basis. 'Supervisory Review' on Pillar 2 applied the same as that of the Federal Reserve Board (USA) and the Financial Services Authority (UK).
Supervisory reviews arranged to focus on:
Each above the minimum capital requirement according to Pillar 1 level, and
Initial actions needed to overcome the risks that will arise.
Pillar 2 also covers review of the interest rate in the banking book. Basel Committee paper "Principles for the Management and Supervision of Interest Rate Risk" which was published in July 2004 containing details of how to manage interest rate risk in the trading book.
Pillar 3 - Disclosure
Pillar Pillar 3 is about market discipline. The Bank for International Settlements (BIS) defines market discipline as a good corporate governance mechanisms of internal and external to the free market economy without government interference.
Pillar 3 is structured to:
1. help bank shareholders and market analysts;
2. increase transparency on issues such as:
Bank asset portfolios, and
The bank's risk profile
Basel I only includes Pillar 1. In practice Pillar 2 and 3 will be found in all countries, although different approaches and their application far.
Risk Coverage - credit, market, operational and other risks
Basel Committee Pillar 1 focuses on credit risk and operational while the Market Risk Amendment does not change. Pillar 1 marked the first time by dicover operational risk quantitative approach. In addition, the Basel Committee to cover 'other risks' on Pillar 2 and 3.
Friday, August 28, 2009
Basel II Development
In 1999 the Basel Committee working with the major banks of member countries to develop a new Capital Accord. The aim is to cover all risks into a banking capital adequacy framework is comprehensive.
Development of Basel II coincides with the movement in the countries the EU to balance the financial and banking market → known as the Financial Market Programs.
Basel II, with a few changes will be the basis for the countries to the EU capital adequacy calculations - the Capital Requirements Directive (CRD).
Development of Basel II coincides with the movement in the countries the EU to balance the financial and banking market → known as the Financial Market Programs.
Basel II, with a few changes will be the basis for the countries to the EU capital adequacy calculations - the Capital Requirements Directive (CRD).
Sunday, August 23, 2009
Weaknesses of Basel I Accord
Basel I and the risk of corporate credit
Along with the success of Market Risk amendment, many bank credit internal change process with a quantitative model similar to the technique because Var:
Var success model by many banks, and
Increased risk of trade credit, because the loan syndication is becoming increasingly complex and sekuritisasi bank loans become more.
Approach of Basel I capital adequacy of the RWA to give the same weight so that the capital needs of the same for all loans, regardless of memperharikan credit grade borrowers.
banks that lend to companies with credit standing is required to have a very good investment with the bank that lend to the company's credit standing with the ugly. This is not a problem for the bank can charge the same to all debtors. However, competition with the bank increased corporate bond market where the margin of credit associated with the bond market credit grading on the bonds issued based on the rating of the institution pemeringkat such as Standard & Poor's and Moody's Investors Service.
The same problem appears to Unsecured personal lending (credit card lending) and a loan to the government (Sovereign loans).
Along with the success of Market Risk amendment, many bank credit internal change process with a quantitative model similar to the technique because Var:
Var success model by many banks, and
Increased risk of trade credit, because the loan syndication is becoming increasingly complex and sekuritisasi bank loans become more.
Approach of Basel I capital adequacy of the RWA to give the same weight so that the capital needs of the same for all loans, regardless of memperharikan credit grade borrowers.
banks that lend to companies with credit standing is required to have a very good investment with the bank that lend to the company's credit standing with the ugly. This is not a problem for the bank can charge the same to all debtors. However, competition with the bank increased corporate bond market where the margin of credit associated with the bond market credit grading on the bonds issued based on the rating of the institution pemeringkat such as Standard & Poor's and Moody's Investors Service.
The same problem appears to Unsecured personal lending (credit card lending) and a loan to the government (Sovereign loans).
Tuesday, August 18, 2009
Risk Based Regulation
Basel I did not know that the capital a bank must be connected with the credit standing of:
- Borrower
- Publisher securities
- Other parties who have financial obligations to the bank (eg a guarantor)
Broadest category of others who use Basel I and sensitivity to the process simple add-on for counterparty credit risk, limit the scope of risk based regulation.
Market Risk Amendment Var model that uses the first element of risk based regulation → an early step in a major development of risk-based regulation.
- Borrower
- Publisher securities
- Other parties who have financial obligations to the bank (eg a guarantor)
Broadest category of others who use Basel I and sensitivity to the process simple add-on for counterparty credit risk, limit the scope of risk based regulation.
Market Risk Amendment Var model that uses the first element of risk based regulation → an early step in a major development of risk-based regulation.
Thursday, August 13, 2009
Value at Risk (VaR)
Quantitative models used by banks and accepted by the Committee referred to the model var. This model shows a maximum value over the estimated losses due to market risk of a bank's portfolio:
During a certain holding period, and
With a certain level of confidence (eg a certain probability)
Add-on techniques (techniques of Basel I for off-market assets) and Var technique is to achieve the same value that indicates a transaction (or portfolio value of all bank transactions, where they occur it is likely to offset each other) during a period (holding period).
Holding period of a transaction known as the Var → Horizon for most of the market transaction is 1 day, so it is often called the Daily Var or DVaR measure.
Reports can be risk of a bank statement containing the following:
'have a portfolio of trade DVaR of USD 5 million on the level
95% '
Meaning DVaR above is:
'in one day trading period there is a 5% likelihood that the portfolio's losses could exceed USD 5 million'
Figures in the Var model does not provide estimates of the actual losses that will occur eg in the example above there is no indication how much of USD 5 million loss will occur because it → Var must be equipped with a stress test.
During a certain holding period, and
With a certain level of confidence (eg a certain probability)
Add-on techniques (techniques of Basel I for off-market assets) and Var technique is to achieve the same value that indicates a transaction (or portfolio value of all bank transactions, where they occur it is likely to offset each other) during a period (holding period).
Holding period of a transaction known as the Var → Horizon for most of the market transaction is 1 day, so it is often called the Daily Var or DVaR measure.
Reports can be risk of a bank statement containing the following:
'have a portfolio of trade DVaR of USD 5 million on the level
95% '
Meaning DVaR above is:
'in one day trading period there is a 5% likelihood that the portfolio's losses could exceed USD 5 million'
Figures in the Var model does not provide estimates of the actual losses that will occur eg in the example above there is no indication how much of USD 5 million loss will occur because it → Var must be equipped with a stress test.
Saturday, August 8, 2009
Market Risk Amendment
Basel I is often criticized because of lack of sensitivity to risk, and sensitivity to risk is the basic idea at the time of the Committee of Basel I.
Sensitivity level of risk increased when the Basel Committee issued a 'the amendment to the Capital Accord to incorporate Market Risks' in January 1996 (known as the "Market Risk amendment")
Market Risk Amendment is the peak of the process when the Committee published a paper entitled 'The Supervisory Treatment of Market Risks' and ask the bank and the market to provide commentary. Then in 1994 Committee to do research on the use of internal models by banks to calculate the market risk.
Internal model of the views of each bank to the risk that you run with a different approach from the RWA Basel I.
Basel Committee and the Market Risk amendment with the 'twin-track approach'. This approach of assessing the accuracy of the pengaplikasian quantitative internal model and the quality of the implementation process.
Sensitivity level of risk increased when the Basel Committee issued a 'the amendment to the Capital Accord to incorporate Market Risks' in January 1996 (known as the "Market Risk amendment")
Market Risk Amendment is the peak of the process when the Committee published a paper entitled 'The Supervisory Treatment of Market Risks' and ask the bank and the market to provide commentary. Then in 1994 Committee to do research on the use of internal models by banks to calculate the market risk.
Internal model of the views of each bank to the risk that you run with a different approach from the RWA Basel I.
Basel Committee and the Market Risk amendment with the 'twin-track approach'. This approach of assessing the accuracy of the pengaplikasian quantitative internal model and the quality of the implementation process.
Monday, July 27, 2009
Capital Requirements in Basel I
Capital Structure
Calculation of minimum capital that must be owned by a bank does not determine the structure of capital that must be owned.
Basel I does not only create a framework for calculating capital adequacy, but also the framework for bank capital structure (or called 'eligible capital')
Basel elements that set the main bank's eligible capital is equity capital (capital stock)
However, banks can have a capital in Tier 2 are:
Tier 1 - the stock has been issued and fully paid and non-cumulative perpetual preferred stock and disclosed réservés
Tier 2 - undisclosed réservés, revaluasi reserve assets, pencadangan general and specific, hybrid capital instruments and subordinated debt
Tier 2 capital can not be more than 50% of total capital
Calculation of capital should not include:
Goodwill
Investment in companies and companies that are not consolidated
Investment in bank capital and other financial companies (depending on the bank supervisory policies of each country)
Minority investments in companies that are not consolidated (eg, on the other bank)
There is a Tier 3 is available only to support the bank's portfolio of trade.
Wednesday, July 22, 2009
The ‘GRID’ And ‘LOOK UP’ Table Approach
In practice, all banks operating under Basel I will be the 'grid' as in table 2.3 and 2.4 to calculate the equivalent level of credit risk from transactions. The Bank will also have a 'look-up table' as in table 2.1. and 2.2 to calculate the level of RWA to determine capital needs.
Adequacy of the Regulatory return on capital
Bank business is not static and the level of RWA will change with the new contract or a contract for which the due date.
In this situation the bank has 2 options namely:
Determine the level of capital adequacy, while the amount of RWA that are available should fix *. However, this situation limits the ability to obtain bank new business, or
Increasing the capital adequacy increased when RWA
Mem-fix-a capital adequacy akan RWA difficult because of the instrument will be increased without any new business.
Return on Regulatory capital is a measure to ensure that a transaction generate enough capital to improve bank. Please note that the cost of risk is not specifically measured except through the acquisition margin is calculated in the 'net earning'. Determining whether income is sufficient to separate the parameters.
Friday, July 17, 2009
Credit Risk Equivalence
Credit Risk Equivalence
The existence of diversification activities of the bank, the higher the need to calculate the ekposure on off-balance sheet. Generally off balance sheet liabilities is kontinjen such as guarantees, options, acceptance, warranties. No cash or physical assets to show the value in the balance sheet. Balance does not record the contract, only to record the results. Example: the contract of insurance is listed → premium must be paid, not a contract.
Basel Committee to introduce the concept of credit risk equivalence in March 1986 in a paper entitled "The Management of Banks' Off-Balance-Sheet Exposures: A Supervisory Perspective."
The concept of credit risk equivalence is' each transaction off-balance-sheet can be converted into equivalent loan so that it can be inserted into the on-balance-sheet to calculate the RWA. This ensures that the definition includes all obligations RWA bank not only asset-a loan or other asset.
Standard credit substitute instruments
List posts in the off-balance-sheet with a simple Conversion Factors (CF):
Instruments represent the general category and bank supervisors each country can add the instrument to a specific category.
Derivative Instruments → treated differently
Derivative instruments are financial transactions where the amount of principal is not exchanged. Price is determined from the value of one / more items below:
Financial instruments
Index
Commodity, or
Other derivative instruments
If the counterparty TORT, banks did not experience any loss of value of the swap contract, but only as potential cost to replace the cash flow equivalent of the contract (the credit equivalent). CF to mark-to-market Exposure is 50% of the CF table above.
Contracts and derivatives, among others:
Swaps and interest rate options, forward rate agreements, interest rate futures
exchange rate Swaps and options, forward foreign exchange contracts, currency futures (out of contract with maturity <14 days)
precious and non-precious Metals Swaps and options, forwards and futures contracts
Swaps equity and equity options and futures contracts
Two methods to calculate the credit equivalent of the contracts this:
The Current Exposure Method
The Original Exposure Method
(Two of this method does not reflect the Value at Risk Models → Var appear after the new Committee to publish the risk of changes in the market in 1996)
The Current Exposure Method → method chosen by the Basel I
This method is the current replacement cost of the contract with the mark-to-market according to market prices.
→ a simple process given that the market is a derivatives market which many are
→ this method is accurate and provide a clear comparison between the derivatives market and the loan equivalent of time
Value mark-to-market change continuously as the value of contracts is influenced by various factors, eg interest rate swap is very much dependent on the movement of interest rate related.
When the value of mark-to-market positive, indicating the value of the loss will be experienced by the bank when the counterparty TORT. However, because the value of mark-to-market fluctuates up to maturity, there is a risk that credit will be increased eksposure than the value of mark-to-market at this time.
A capital charge is applied to eksposure this by adding additional% of the notional principal value of the mark-to-market at this time.
The Original Exposure Method
This method allows the bank calculates% of the notional principal without the current value of the contract.
In Basel I banks permitted to use this method while the time while waiting diimplementasikannya Current Exposure Method. This is generally applied to banks have matched the position of small, but for banks that do forwards, Swaps, options purchased, etc. should use the Current Exposure Method.
Calculation of capital requirement
Capital needs RWA x is the minimum target capital ratio (8%)
The existence of diversification activities of the bank, the higher the need to calculate the ekposure on off-balance sheet. Generally off balance sheet liabilities is kontinjen such as guarantees, options, acceptance, warranties. No cash or physical assets to show the value in the balance sheet. Balance does not record the contract, only to record the results. Example: the contract of insurance is listed → premium must be paid, not a contract.
Basel Committee to introduce the concept of credit risk equivalence in March 1986 in a paper entitled "The Management of Banks' Off-Balance-Sheet Exposures: A Supervisory Perspective."
The concept of credit risk equivalence is' each transaction off-balance-sheet can be converted into equivalent loan so that it can be inserted into the on-balance-sheet to calculate the RWA. This ensures that the definition includes all obligations RWA bank not only asset-a loan or other asset.
Standard credit substitute instruments
List posts in the off-balance-sheet with a simple Conversion Factors (CF):
Instruments represent the general category and bank supervisors each country can add the instrument to a specific category.
Derivative Instruments → treated differently
Derivative instruments are financial transactions where the amount of principal is not exchanged. Price is determined from the value of one / more items below:
Financial instruments
Index
Commodity, or
Other derivative instruments
If the counterparty TORT, banks did not experience any loss of value of the swap contract, but only as potential cost to replace the cash flow equivalent of the contract (the credit equivalent). CF to mark-to-market Exposure is 50% of the CF table above.
Contracts and derivatives, among others:
Swaps and interest rate options, forward rate agreements, interest rate futures
exchange rate Swaps and options, forward foreign exchange contracts, currency futures (out of contract with maturity <14 days)
precious and non-precious Metals Swaps and options, forwards and futures contracts
Swaps equity and equity options and futures contracts
Two methods to calculate the credit equivalent of the contracts this:
The Current Exposure Method
The Original Exposure Method
(Two of this method does not reflect the Value at Risk Models → Var appear after the new Committee to publish the risk of changes in the market in 1996)
The Current Exposure Method → method chosen by the Basel I
This method is the current replacement cost of the contract with the mark-to-market according to market prices.
→ a simple process given that the market is a derivatives market which many are
→ this method is accurate and provide a clear comparison between the derivatives market and the loan equivalent of time
Value mark-to-market change continuously as the value of contracts is influenced by various factors, eg interest rate swap is very much dependent on the movement of interest rate related.
When the value of mark-to-market positive, indicating the value of the loss will be experienced by the bank when the counterparty TORT. However, because the value of mark-to-market fluctuates up to maturity, there is a risk that credit will be increased eksposure than the value of mark-to-market at this time.
A capital charge is applied to eksposure this by adding additional% of the notional principal value of the mark-to-market at this time.
The Original Exposure Method
This method allows the bank calculates% of the notional principal without the current value of the contract.
In Basel I banks permitted to use this method while the time while waiting diimplementasikannya Current Exposure Method. This is generally applied to banks have matched the position of small, but for banks that do forwards, Swaps, options purchased, etc. should use the Current Exposure Method.
Calculation of capital requirement
Capital needs RWA x is the minimum target capital ratio (8%)
Sunday, July 12, 2009
Capital Adequacy Ratio (CAR)
Risk-weighted-assets (RWA) is a post-post in the balance sheet that has been multiplied by the weight of the risk → used to calculate the capital requirement.
Basel Committee found the system to help banks set a level of RWA, depending on the risk weighting of each of the post balance sheet. Each instrument is grouped into 5 categories depending on the credit standing of the counterparty. The weight used was 0%, 10%, 20%, 50% and 100%.
OECD (The Organization for Economic Co-operation and Development) is a group of 30 countries that made commitments to mendemokratisasi the government and the economy.
In Basel I risk some weight to the discretion of supervisors of each State, for example loans to local government can be 0%, 10%, 20% or 50%.
Capital Adequency Ratio (CAR)
Basel I Accord build the relationship between capital and risk, with a simple multiplier factors for the different government debt, bank debt, corporate and individual debt and multiplying it with a target capital ratio. Target capital ratio is the ratio of capital to RWA for international banks.
Basel Committee set a minimum target capital ratio of 8%. Supervisors can set the local rate is higher, when possible, such as in the USA and the UK. Basel Committee specifically allows a minimum current ratio of capital from a bank should reflect risks other than credit risk. (Keep in mind that the risk of dicover only by Basel I credit risk).
Target capital ratio is a simple calculation for the products that are complex. Therefore the Basel Committee revise Basel I to mengcover increased diversification of banking activities.
Basel Committee found the system to help banks set a level of RWA, depending on the risk weighting of each of the post balance sheet. Each instrument is grouped into 5 categories depending on the credit standing of the counterparty. The weight used was 0%, 10%, 20%, 50% and 100%.
OECD (The Organization for Economic Co-operation and Development) is a group of 30 countries that made commitments to mendemokratisasi the government and the economy.
In Basel I risk some weight to the discretion of supervisors of each State, for example loans to local government can be 0%, 10%, 20% or 50%.
Capital Adequency Ratio (CAR)
Basel I Accord build the relationship between capital and risk, with a simple multiplier factors for the different government debt, bank debt, corporate and individual debt and multiplying it with a target capital ratio. Target capital ratio is the ratio of capital to RWA for international banks.
Basel Committee set a minimum target capital ratio of 8%. Supervisors can set the local rate is higher, when possible, such as in the USA and the UK. Basel Committee specifically allows a minimum current ratio of capital from a bank should reflect risks other than credit risk. (Keep in mind that the risk of dicover only by Basel I credit risk).
Target capital ratio is a simple calculation for the products that are complex. Therefore the Basel Committee revise Basel I to mengcover increased diversification of banking activities.
Tuesday, July 7, 2009
Basel I Accord
Objectives of Basel I
Basel Committee for banking supervision was established in 1974 by central bank governors from the Group of Ten (G10), to focus on banking regulations and practices of bank supervision. Basel Committee consists of 11 members, and G10 plus Spain and Luxembourg, which are:
Belgium, Japan, Luxembourg, France, the Netherlands, Germany, Sweden, Switzerland, UK, Canada, Spain, USA, Italy
Developed three objectives of Basel I Accord:
- strengthen the health and stability of international banking system
- create a fair framework in the capital needs of banks active in international
- have a framework which is applied consistently to reduce the competition is not balanced among banks active in international
Basel Committee for banking supervision was established in 1974 by central bank governors from the Group of Ten (G10), to focus on banking regulations and practices of bank supervision. Basel Committee consists of 11 members, and G10 plus Spain and Luxembourg, which are:
Belgium, Japan, Luxembourg, France, the Netherlands, Germany, Sweden, Switzerland, UK, Canada, Spain, USA, Italy
Developed three objectives of Basel I Accord:
- strengthen the health and stability of international banking system
- create a fair framework in the capital needs of banks active in international
- have a framework which is applied consistently to reduce the competition is not balanced among banks active in international
Tuesday, June 16, 2009
The development of international
The development of international
Control of competition between countries are also experiencing growth due to liberalization of free trade globally. However, a more significant is menguatnya the economy and politics of the EU. Liberalization among the countries strengthen relationships between financial institutions, markets and countries.
Impact on the bank supervisory and regulatory
Developments in the financial market liberalization and the inter-state bank supervisors, especially considering that the central bank's financial regulations have been much weakened.
Before the period of liberalization in the year 1970 and the 1980s focused on the financial regulations:
Authorization of financial institutions
Provide a strict restriction on the activities permitted for financial institutions in different
Definition of ratio-the ratio of balance sheet and bank obligations such as mandatory minimum level of cash manjaga on the central bank (GWM) to maintain minimum assets or securities in the domestic.
Development of new regulations
Measure of market performance with respect to their income from the risk they take. If the supervisor can create rules in line with the market so they can make the rules more effective and more relevant to the institutions that set.
The increasing globalization to improve the capital market needs to ensure that norms circumspection accepted internationally and are implemented consistently
Regulations only a part of the solution. Risk of the international financial intermediasi depends on several things such as ensuring minimum standards in the bankruptcy law, accounting and auditing standards and the obligation of transparency (disclosure).
Control of competition between countries are also experiencing growth due to liberalization of free trade globally. However, a more significant is menguatnya the economy and politics of the EU. Liberalization among the countries strengthen relationships between financial institutions, markets and countries.
Impact on the bank supervisory and regulatory
Developments in the financial market liberalization and the inter-state bank supervisors, especially considering that the central bank's financial regulations have been much weakened.
Before the period of liberalization in the year 1970 and the 1980s focused on the financial regulations:
Authorization of financial institutions
Provide a strict restriction on the activities permitted for financial institutions in different
Definition of ratio-the ratio of balance sheet and bank obligations such as mandatory minimum level of cash manjaga on the central bank (GWM) to maintain minimum assets or securities in the domestic.
Development of new regulations
Measure of market performance with respect to their income from the risk they take. If the supervisor can create rules in line with the market so they can make the rules more effective and more relevant to the institutions that set.
The increasing globalization to improve the capital market needs to ensure that norms circumspection accepted internationally and are implemented consistently
Regulations only a part of the solution. Risk of the international financial intermediasi depends on several things such as ensuring minimum standards in the bankruptcy law, accounting and auditing standards and the obligation of transparency (disclosure).
Thursday, June 11, 2009
Stability And Competition
Financial Stability (Financial Stability)
With financial stability is a situation where the finance company and the market can efficiently mobilize savings, provide liquidity and allocate investment without interference. Potentially subject to financial stability occurs when the periodic failure of financial institutions. Failure is only a periodic attention when terganggunya cause the banking system.
Monetary Stability
Monetary stability is the stability of currency values (ie low and stable inflation). Monetary stability, financial stability, with different. Although the same can happen, they do not always become a 'fellow travelers'.
Financial Liberalization
The main reasons why monetary policy that does not always result in successful financial stability is the 'wave' liberalization of the financial market in the year 1970 and the 1980s. Role in managing the country's economy was reduced through the following actions:
With rules gone that inhibit competition among financial institutions, including the liberalization bank operational requirements permit, which is the major part of the regulation until the 1970s
With absence limit-limit financial transactions such as the maximum interest rate of loans and deposits
With absence international capital movement restrictions at the same time with the introduction of currency exchange
Competition and banking
Liberalization of financial market pressure to increase competition among banks with:
Forcing banks to reduce the margin business - a bank must be the product more competitive (in price)
Creating a large number of newcomers, so that increased competition
Difficulty in obtaining the same in this situation means that many institutions are forced to increase the risk of the acquisition be to maintain revenue.
Innovation of financial products
Liberalization of the financial sector also cause a period in which innovations occur rapidly, especially the growth of products such as futures, options and Swaps (derivatives market) and sekuritisasi assets. These products increase the ability of banks to move the risk among banks and investors and to the other.
With financial stability is a situation where the finance company and the market can efficiently mobilize savings, provide liquidity and allocate investment without interference. Potentially subject to financial stability occurs when the periodic failure of financial institutions. Failure is only a periodic attention when terganggunya cause the banking system.
Monetary Stability
Monetary stability is the stability of currency values (ie low and stable inflation). Monetary stability, financial stability, with different. Although the same can happen, they do not always become a 'fellow travelers'.
Financial Liberalization
The main reasons why monetary policy that does not always result in successful financial stability is the 'wave' liberalization of the financial market in the year 1970 and the 1980s. Role in managing the country's economy was reduced through the following actions:
With rules gone that inhibit competition among financial institutions, including the liberalization bank operational requirements permit, which is the major part of the regulation until the 1970s
With absence limit-limit financial transactions such as the maximum interest rate of loans and deposits
With absence international capital movement restrictions at the same time with the introduction of currency exchange
Competition and banking
Liberalization of financial market pressure to increase competition among banks with:
Forcing banks to reduce the margin business - a bank must be the product more competitive (in price)
Creating a large number of newcomers, so that increased competition
Difficulty in obtaining the same in this situation means that many institutions are forced to increase the risk of the acquisition be to maintain revenue.
Innovation of financial products
Liberalization of the financial sector also cause a period in which innovations occur rapidly, especially the growth of products such as futures, options and Swaps (derivatives market) and sekuritisasi assets. These products increase the ability of banks to move the risk among banks and investors and to the other.
Saturday, June 6, 2009
Capital And Liquidity
When a bank provides loans and borrowers can not pay, Insolvency of the bank not only capital spending but also DPK shareholder bank, the natural business of banks is' highly geared 'or' highly leveraged '.
Gearing
Gearing is the ratio of debt to the company's capital. Almost all banks (except special bank) has a high leverage for using DPK for the credit.
Capital
Capital is the number of shareholders in the investment bank as stated in the balance sheet. Capital a bank is the financial resources available for capital because of losses mengabsorb not need to be paid.
Insolvency
Insolvency is the inability of companies to pay all obligations due. Bank which is in the position of suffering is called solvency crisis.
Bank solvency crisis in the economy can affect the minor / local. However, when the page crisis affecting the banking sector, the economy may be affected.
There is a rumor about the problem can cause the depositor attract funds (rush). Because the bank can not ask the debtor to immediately settle the loan, the bank can experience the same fate as a result of bad debts and the bank will suffer a crisis of liquidity.
Without a mechanism for the management of liquidity, illiquidity / liquidity crisis can cause Insolvency. When widespread liquidity crisis, the impact on the economy will be the same as the impact of the crisis on the banking industry solvency.
Central banks as' lenders of last resort '
Role of central banks as a guardian (and as a supervisor) from the banking system began in the 18-th century.
In the interest of the community, because the status spesialnya, banks sometimes require assistance from the central bank. Central bank to provide support through their role as' lenders of last resort 'to maintain the stability of the financial system.
As' lenders of last resort 'central bank provides funds to commercial banks to ensure that the solvency or liquidity crisis will not become the economic crisis.
Gearing
Gearing is the ratio of debt to the company's capital. Almost all banks (except special bank) has a high leverage for using DPK for the credit.
Capital
Capital is the number of shareholders in the investment bank as stated in the balance sheet. Capital a bank is the financial resources available for capital because of losses mengabsorb not need to be paid.
Insolvency
Insolvency is the inability of companies to pay all obligations due. Bank which is in the position of suffering is called solvency crisis.
Bank solvency crisis in the economy can affect the minor / local. However, when the page crisis affecting the banking sector, the economy may be affected.
There is a rumor about the problem can cause the depositor attract funds (rush). Because the bank can not ask the debtor to immediately settle the loan, the bank can experience the same fate as a result of bad debts and the bank will suffer a crisis of liquidity.
Without a mechanism for the management of liquidity, illiquidity / liquidity crisis can cause Insolvency. When widespread liquidity crisis, the impact on the economy will be the same as the impact of the crisis on the banking industry solvency.
Central banks as' lenders of last resort '
Role of central banks as a guardian (and as a supervisor) from the banking system began in the 18-th century.
In the interest of the community, because the status spesialnya, banks sometimes require assistance from the central bank. Central bank to provide support through their role as' lenders of last resort 'to maintain the stability of the financial system.
As' lenders of last resort 'central bank provides funds to commercial banks to ensure that the solvency or liquidity crisis will not become the economic crisis.
Wednesday, May 20, 2009
Regulations and Indonesian Banking System
Indonesian Banking System
Banking laws in 1992 and 1998 divide the 2 types of banks in Indonesia.
Commercial Bank offers a full service financial services including currency exchange. The Bank has access to the payment system and provide banking services in general.
Perkreditan Bank Rakyat (BPR), is smaller than commercial banks, and generally operate in local. BPR can accept deposits but does not have access to the system of payment (clearing).
Besides banks, there is a non-bank institutions such as the Village Credit Board (BKD) and rural credit unions (LDKP).
Banking regulations → pesar developed since 1998
Banking Act 1998 replaces the 1992 Banking Law: Defining the type of bank and its operating conditions and limits of each
Bank Indonesia 1999: Set the BI as the central bank is independent and set up goals and tasks of the BI
Audit and Compliance 1999: Defining the needs of the audit and compliance function in banks
Commercial Bank 2000: Setting a permit and operational requirements of the commercial bank bank
Know Your Customer Principles 2001: Defining the procedures and practices that should be used in identifying bank customers to monitor account activity and customer
Fit and Proper Test 2003: Setting a fit and proper test conducted by BI mengkontrol to the shareholders and senior bank management
Market Risk 2003: Defining the minimum capital requirement for commercial banks to consider the position of bank market risk
Risk Management 2003: Defining the needs of bank risk management infrastructure
Commercial Bank's Business Plan 2004: Setting a commercial bank must submit a business plan for the short & medium term
BMPK 2005: Setting a concentration of credit risk of bank portfolios
Information System debtor 2005: Require banks to report all information to the debtor, BI
Sekuritisasi Assets 2005: Defining the principles to be followed by banks in their asset sekuritisasi
BI also announced the Indonesian Banking Architecture (API) that define the direction, framework and structure of the banking industry working for 5 - 10 years. Changes will be implemented in stages to achieve the following:
1. Strengthening the structure of the national banking system
2. Improve the quality of banking regulation
3. Improve the function of bank supervisors
4. Improve the quality of bank operations and management
5. Develop the banking infrastructure
6. Improving the protection of customer
Banking laws in 1992 and 1998 divide the 2 types of banks in Indonesia.
Commercial Bank offers a full service financial services including currency exchange. The Bank has access to the payment system and provide banking services in general.
Perkreditan Bank Rakyat (BPR), is smaller than commercial banks, and generally operate in local. BPR can accept deposits but does not have access to the system of payment (clearing).
Besides banks, there is a non-bank institutions such as the Village Credit Board (BKD) and rural credit unions (LDKP).
Banking regulations → pesar developed since 1998
Banking Act 1998 replaces the 1992 Banking Law: Defining the type of bank and its operating conditions and limits of each
Bank Indonesia 1999: Set the BI as the central bank is independent and set up goals and tasks of the BI
Audit and Compliance 1999: Defining the needs of the audit and compliance function in banks
Commercial Bank 2000: Setting a permit and operational requirements of the commercial bank bank
Know Your Customer Principles 2001: Defining the procedures and practices that should be used in identifying bank customers to monitor account activity and customer
Fit and Proper Test 2003: Setting a fit and proper test conducted by BI mengkontrol to the shareholders and senior bank management
Market Risk 2003: Defining the minimum capital requirement for commercial banks to consider the position of bank market risk
Risk Management 2003: Defining the needs of bank risk management infrastructure
Commercial Bank's Business Plan 2004: Setting a commercial bank must submit a business plan for the short & medium term
BMPK 2005: Setting a concentration of credit risk of bank portfolios
Information System debtor 2005: Require banks to report all information to the debtor, BI
Sekuritisasi Assets 2005: Defining the principles to be followed by banks in their asset sekuritisasi
BI also announced the Indonesian Banking Architecture (API) that define the direction, framework and structure of the banking industry working for 5 - 10 years. Changes will be implemented in stages to achieve the following:
1. Strengthening the structure of the national banking system
2. Improve the quality of banking regulation
3. Improve the function of bank supervisors
4. Improve the quality of bank operations and management
5. Develop the banking infrastructure
6. Improving the protection of customer
Friday, May 15, 2009
Economic Impact of 'Risk Event'
Over lending - a phenomenon that is cyclical
Conditions in the Bank 'lent over' akan booming at the time of experience 'under lend' at the time of recession because of the recessionary impact of the investment bank because the bank must make clear to the book bad debts, so that without the new capital in the banks ability to distribute credit will be reduced. This is called 'procyclicality' effect, which can be seen clearly in the phenomenon 'asset bubbles' → excessive borrowing during the boom conditions the expectations of income, and not realistic assessment of assets that are not realistic, as happened in the real estate and stock market, the world .
Procyclicality is a matter that will be the focus of the research on management and credit risk models. Basel II has been criticized over the potential increase in 'procyclicality' from the credit because it is the result of the credit grading models of capital a bank needs. So memburuknya credit grading of the loan will cause the rising capital needs regardless of whether bad debts increased or not.
Market and Liquidity Risk
Market risk events increases as the impact of increased trade in the asset market, where trading assets is not without problems. Mathematical model used to identify and understand the risk has long been used, but there is still a short distance before the results of calculation to be reliable indicators of trends in market risk.
Liquidity crisis may rarely occur in the retail banking, but often occur in the wholesale market. Wholesale banks do not collect the funds, menjaminkan assetnya (such as government bonds and corporate) to seek funds. If the asset is not liquid (ie the investor does not want to buy or buy with low prices), there will be a liquidity crisis. For the impact of liquidity crisis to be done:
Increasing vigilance bank supervisors
Quick reaction from the central bank, and
Strict monitoring of management by the bank.
Changes in market conditions is one of the things that cause the formation of Basel II Accord is more sensitive to the risk.
Sarbanes-Oxley (SOX)
Bank supervisory agencies often implement new regulations to minimize the problem recurred again. Introduction of these regulations can result in not directly to the customer, through the implementation of cost or change the value of the bank.
For example is the introduction of Sarbanes-Oxley Act in the United States in 2002 that requires that corporate accountability diundangkannya. Regulations are introduced after the accounting scandals bangkrutnya company as a result of Enron and WorldCom.
International Accounting Standards (IAS)
IAS in the year 2005-2006 will be introduced, especially in the European Union. This may affect:
How to book a number of bank hedging in the top of the underlying interest rate risk in their banking book. There are several possibilities are not allowed to Hedge accounting purposes, thereby affecting the level of benefits and volatilitas bank.
Transparency (disclosure) in bank accounting and reporting system, which is required according to Basel II Pillar 3 Disclosure namely. It is not usual to consider a new accounting regulations as a risk event. However, when the introduction of IAS alter the perception of bank profits in the future, it clearly is a risk event. Therefore, it is necessary explanations to the stakeholders on the impact of disadvantage is.
Sunday, May 10, 2009
Failure to Manage Risk
Impact of risk
In addition to direct financial loss, 'risk event' could result in the bank to the other stakeholders, namely shareholders, employees and customers as well as economy.
direct impact on the financial losses of its shareholders and employees
does not directly impact on customers and the economy
Impact on shareholders
Shareholders can be affected by:
Total loss from investment - the company bangkrutnya
The decline in value of investments - stock prices can go down because of damage to reputation, or a decrease in profits
Losses due to a decrease in the dividend the company profit
Indemnification obligations - shareholders may be held responsible for losses that occurred
Impact erhadap employees
Impact on employees, among others:
Turuannya discipline employees because of negligence or kesengajaan
Loss of income, for example: a decrease in bonus or salary increase
PHK
Impact on customers
Impact on the customer can directly or indirectly, and possibly not directly identified. The impact can be long-term impact and provide for additional bank. Therefore difficult to calculate the total loss if a risk event involving the customer.
Impact on bank customers, including:
Decrease in levels of customer service
Reduction in product offered by bank
Liquidity crisis
Changes in bank regulation
Risk Operations and Customer Service
In the event of an 'event plans' customers may be affected directly through:
Quality of services that are less / wrong
Dissolution → service-related technology
Lack of security for customers
There is no service at all
This will affect bank profits because the customers will move to another place of business. This is important if the operational risk caused technical problems that affect thousands of customers.
Impact of an 'operational risk event' to the next customer can cause financial losses for banks, namely:
Payments to customers as compensation from the impact of indirect
Cost of litigation
Fines from the appropriate regulatory authorities
Tuesday, May 5, 2009
Other Risk
Risks categorized as Other Risk is:
Business Risk
Business risk is the risk associated with the competitive position of banks and the prospects for successful bank in the market conditions change.
Although the business risk is not included in the definition of the Basel operational risk, but this risk should be the focus of senior bank management and board of directors.
Risk business prospects include, among other short-term and long-term products and services that exist in the bank.
Strategic risk
Strategic risk is the risk associated with long-term business decisions by senior management of banks. Risk is also related to the implementation of the strategy.
Strategic risk and business risk is the same, but different time period and the importance of the decision. Risks associated with strategic decisions such as:
Business to what the bank will make investment
Business is to be acquired, and / or
Where and the extent to which business will be discontinued or sold.
Reputation Risk
Reputation risk is the risk of potential damage to the company due to the negative public opinion.
Reputation risk not only limited to the reputation of a bank, but also to the banking industry. Although 'risk event' occurred in a bank, but the reputation of a product or sector can affect the entire banking industry.
Currently, the risk of increased reputation and impact in terms of speed, that is because the market has global financial and trading occurs 24 hours a day. So that damage to the reputation of a bank can occur at any time and are reported in 'real time' throughout the world.
Calculate the losses due to reputation risk is difficult because the impact of long-term and wide-spread.
Wednesday, April 29, 2009
Operational Risk
Operational risk (according to Basel II) is a risk of loss due to the inability or failure of internal processes, people, systems or from external events. More operational risks can also be caused by the legal risk (Regulatory and legal requirement).
Although the definition of Operational Risk in Basel II does not include business risk, strategic risk and reputation risk, banks should include risks at the time of the RBC.
Operational risk is the most important risks that affect our customers every day. Because of that bank to increase attention on the process, procedures and controls relating to operational risks.
In the last 20 years, the operational risks of mismanagement have created a great loss to the bank as well as credit risk and market risk.
Daily problem that affects every bank, among others:
failure to reconciliation of payments made / created bank
error transactions by trader or back office staff is a result of an error position in the market and cause problems in the bank reconciliation
failure to balance the debit and credit received by banks
system failure due to the computer system upgrade
external events such as floods or power off
Changes in the banking sector caused a change in operational risks. Incident which caused the loss is replaced by a small incident by a rare but provide a big impact (Low Frequency / High Impact).
Therefore, Basel II requires banks to:
Calculate / mengkuantifikasi operational risks
Measuring operational risk
allocate capital as credit risk and market risk
Some of the reasons why the risk of bank operational changes:
Automation
Dependence on technology
Outsourcing
Terrorism
Globalization
Trader who prankish (rogue trader)
Increase in value and volume of transactions, and
Increase in the legal process.
Friday, April 24, 2009
Credit Risk
Credit risk is the risk of loss due to counterparty not fulfilling their obligations or where the risk of borrowers not paying debts
Credit risk may occur when the loan is given, or bonds purchased by the bank unpaid. Credit risk can also arise because of non-performance of other parties, such as a failure of payment of a derivatives contract.
For most banks, credit risk is the risk that they face. While the margin is relatively small compared to loans that were distributed, so that losses due to credit can quickly spend bank capital.
Methods that can be done by the Bank to manage the Credit Risk / Credit Risk Mitigation
a.Grading models
b.Loan portfolio management
c.Sekuritisasi
d.Collateral
e.Cash flow monitoring
f.Recovery management
a. Grading Models
With the grading model, banks can perform the test against the risk, allowing banks determine the likelihood of a result of the ugly / bad outcome (referred to as the probability of default - PD). Bank can ensure that their loan portfolio is not concentrated on the ugly credit (poor quality loans) with the possibility of a default rate.
Pemeringkat agencies such as Moody's, S & P using the grading model to calculate the credit risk of a bond.
In practice, grading model to consider other factors, such as% of debtors that are used to pay interest on loans, job history and old loan borrowers compared to the age of borrowers.
Basel II specifically emphasized the grading model as part of the credit risk framework.
b. Loan Portfolio Management
Avoid the concentration of the industry / geographic region specific.
Portfolio loans terdiversifikasi well mean that the risk of a default is also lower.
Analysis of the portfolio is called the 'cohort analysis' and can be applied to a loan corporation or individual.
c. Sekuritisasi
Other steps that can be done to guard from the 'shock economy' is a mem-'package 'portfolios and to sell some loans to investors sekuritisasi →
Sekuritisasi allows banks to reduce lending big prosentasenya in the credit portfolio and the high-risk loans. The bank funds can invest in assets that have assumed a lower risk.
d. Collateral
Collateral is defined as assets by the debtor diagunkan to guarantee loans and can be confiscated when going TORT.
The Bank must ensure that the collateral can minimize risk at the time of going TORT. The Bank must ensure that the value of collateral stand still (not down) when going TORT.
Type of collateral in Basel I was very limited.
Type of collateral in the Basel II more knowledgeable, especially on the approach to the Internal Ratings-Based (IRB) for credit risk.
e. Cash flow monitoring
Bank can reduce credit risk by:
Limit the level eksposure → Exposure at default - EAD
Ensure that customers react quickly to changing circumstances.
f. Recovery Management
Many realize that the management of bank bad debts that can efficiently reduce the losses that occur due to the bank so formed a special division to handle bad debts.
Loss Given Default (LGD) is the estimated amount of the loss is capable of dipikul by the bank as a result of a default. LGD and the establishment of management plays an important role in the IRB approach to calculate credit risk capital. LGD value in the IRB approach is directly influenced by the bank estimates about how much recovery can be done in bad debts.
Sunday, April 19, 2009
Market Risk
Market Risk is the risk of loss in the 'on and off balance sheet' due to market price movements (changes in interest rates, exchange rates and market prices, such as stocks and commodities).
Banks are exposed to the risk of the market due to:
Traded market risk - the risk of loss of value of an investment bank to which the trading activity for a profit.
Interest rate risk in the banking book - is the risk that caused the structure of a business run by banks such as the provision of credit and union funds.
To avoid the above conditions, the Bank must perform matching between the interest rate funding and lending (hedging) to secure the value of DPK or credit, by:
offer the same interest rate loans with interest rates DPK. Interest rates change based on the credit interest rate discount from the central bank change the interest rate or a fixed deposit rate of 5 years.
Lend funds to other banks with a fixed rate for 5 years
When available derivatives market, banks can do the swap transactions with other banks, which pay other banks with interbank interest rates 1 month and receive 5-year fixed rate.
The yield curve shows the relationship between interest rates (Y) that is paid to the maturity (X) of an investment in a certain period. Yield curve is used to calculate the market price on the trading position.
Tuesday, April 14, 2009
Bank Regulation
Basel I
In 1988 the Basel Committee set a 'standardized methodology to calculate the number of RBC that a bank must be met.
Accord 1 only mengcover Credit Risk and the relationship between risk and capital. In the Basel I set the target capital ratio is equal to government debt, bank debt, corporate debt and individuals amounting to 8%.
The Market Risk amendment
Bank supervisors in some countries of Basel I want to be more 'risk-sensitive' so that they adapt the calculation of risk is used by some banks manage the risk in the transaction 'dealing' they (the banks need to set their own internal capital) ..
This is done by banks as a result of:
growth of derivatives market
option pricing model that directly connects volatilitas level of income with the price of the instrument being → risk-based pricing
In 1996, Basel Committee introduced a Market Risk amendment. In addition to set simple method to calculate the market risk, Basel Committee recommends bank supervisors to use the method of calculation of risk-based pricing that is using the Value at Risk models (Var).
Basel II
Introduced in 2004 and will be implemented in the year 2006 - 2007.
Key Basel II:
Connecting the capital of a bank directly with the bank's business risk
Capital for market risk is not substantially changed from the Market Risk amendment in 1996.
Banks are encouraged to use a 'model-based approach' to credit risk pricing.
To include operational risks for the first time, and also encourage banks to use a 'model approach'
There are provisions on the 'other risks' in the RBC, but other risks are not dicover by' model approach '
In 1988 the Basel Committee set a 'standardized methodology to calculate the number of RBC that a bank must be met.
Accord 1 only mengcover Credit Risk and the relationship between risk and capital. In the Basel I set the target capital ratio is equal to government debt, bank debt, corporate debt and individuals amounting to 8%.
The Market Risk amendment
Bank supervisors in some countries of Basel I want to be more 'risk-sensitive' so that they adapt the calculation of risk is used by some banks manage the risk in the transaction 'dealing' they (the banks need to set their own internal capital) ..
This is done by banks as a result of:
growth of derivatives market
option pricing model that directly connects volatilitas level of income with the price of the instrument being → risk-based pricing
In 1996, Basel Committee introduced a Market Risk amendment. In addition to set simple method to calculate the market risk, Basel Committee recommends bank supervisors to use the method of calculation of risk-based pricing that is using the Value at Risk models (Var).
Basel II
Introduced in 2004 and will be implemented in the year 2006 - 2007.
Key Basel II:
Connecting the capital of a bank directly with the bank's business risk
Capital for market risk is not substantially changed from the Market Risk amendment in 1996.
Banks are encouraged to use a 'model-based approach' to credit risk pricing.
To include operational risks for the first time, and also encourage banks to use a 'model approach'
There are provisions on the 'other risks' in the RBC, but other risks are not dicover by' model approach '
Bank supervisors responsible for the implementation of Basel II in accordance with local laws and regulations. Consistency in implementation it is important to avoid confusion for the reporting of 'home' (country where the bank was established) or 'host' (the state where the branch of the bank to operate).
Comparison of Basel I and Basel II
Basel I Accord:
Focus on the single measure
Simple approach to the risk sensitivity
Using the 'one-sizes-fits-all approach' to risk and capital.
Include credit risk and market risk
Basel II Accord:
Focus on internal methodologies
The higher sensitivity of the risk
Flexible to meet the needs of each bank is different.
Include credit risk, market risk, operational risk and other risks.
Thursday, April 9, 2009
Economic Shock,Systemic Risk,Risk Capital
Economic Shock & Systemic Risk
Although the diversification of the bank to loan portfolios, many banks are still very affected by economic risks in his country. Economy of a country is influenced by:
external shock, eg natural disasters, human caused disasters;
Economic management that incorrect (economic mismanagement)
Bank that is affected by economic conditions may have increased the number of customers in a significant traffic jams. Increasing the 'default rate' this could be caused by:
'Credit standing' companies affected by the declining economy in the country
Increasing the level of sharp penggangguran
Increasing interest rates
Steps to minimize the influence of economics, among others:
Follow the regulations (including Basel II) so that the bank will create economic scenario and ensure that banks have enough capital to protect the influence of stakeholders' economy shock '
Estimate the level of bad debts and the resulting bank to ensure that adequate capital.
Risk and Capital
Above example shows that the risk of a business, the greater the capital required to cover the level of risk faced by the so-called Capital Adequacy.
Risk Based Capital (RBC) is the level of capital that is based on the level of risk. RBC was due to the emergence of international banking market growth in the year 1970 - the 1980s was due to the increase in oil prices so that countries with a surplus at USD menginvestasikannya countries that deficit. This causes the growth of the banking sector is very fast, high-level competition, the emergence of syndicated loans to developing countries / multinational companies, etc..
Although the diversification of the bank to loan portfolios, many banks are still very affected by economic risks in his country. Economy of a country is influenced by:
external shock, eg natural disasters, human caused disasters;
Economic management that incorrect (economic mismanagement)
Bank that is affected by economic conditions may have increased the number of customers in a significant traffic jams. Increasing the 'default rate' this could be caused by:
'Credit standing' companies affected by the declining economy in the country
Increasing the level of sharp penggangguran
Increasing interest rates
Steps to minimize the influence of economics, among others:
Follow the regulations (including Basel II) so that the bank will create economic scenario and ensure that banks have enough capital to protect the influence of stakeholders' economy shock '
Estimate the level of bad debts and the resulting bank to ensure that adequate capital.
Risk and Capital
Above example shows that the risk of a business, the greater the capital required to cover the level of risk faced by the so-called Capital Adequacy.
Risk Based Capital (RBC) is the level of capital that is based on the level of risk. RBC was due to the emergence of international banking market growth in the year 1970 - the 1980s was due to the increase in oil prices so that countries with a surplus at USD menginvestasikannya countries that deficit. This causes the growth of the banking sector is very fast, high-level competition, the emergence of syndicated loans to developing countries / multinational companies, etc..
Saturday, April 4, 2009
Banking
The Bank is an institution that have a banking license, accept deposits, provide loans and receive checks & publish.
Financial Services company is an institution that offers financial products to customers such as pension funds, insurance or bonds. Bank, including financial services company.
Risk is the possibility of a loss / natural / results of the ugly (bad outcome) so is the risk of situations that produce negative things and the results can be predicted in advance.
Two terms related to risk:
Risk Event is an occurrence that causes damage or potential for bad outcome.
Risk Loss is loss (financial or non-financial) that occurred as a result of the direct / indirect risk from the event.
Financial services industry is set to protect customers and increase trust in their products so that products are regulated.
Unlike the bank, which is regulated banking institutions themselves, not only the products and services offered. This difference was due to the failure of a bank will give the impact of the old and in to the economy.
Unlike other industries, the bank is not free to determine their capital structure. Capital structure / capital structure is how a bank finance the business, generally through a combination of issuing shares, bonds and loans.
Capital structure is determined by a bank supervisors bank (BI) that determines the minimum capital and minimum level of liquidity that must be owned by banks, as well as the type and structure of loans granted.
When a bank has sufficient capital, banks have financial resources / liquidity is sufficient to mengcover financial losses, so the bank can finance the assets and meet its obligations at maturity. Note: The minimum capital requirement ratio of = Regulatory capital to RWA (BI → ATMR x 8%).
Basel focuses on banking regulation and not in the financial industry as a whole.
Bank must be set as: 1) the risks inherent in the operational activities; 2) offers of money, so that 3) the failure of a bank (total or partial) can cause a "systemic risk".
Systemic risk is the risk of a bank failure which can destroy the economy and the impact on employees, customers and shareholders.
Solvency of a concern not only the bank's shareholders, customers and employees, but also all those responsible for managing the entire economy.
Term systemic risk are closely tied to 'run on a bank' which occurs when the bank can not cover their obligations, ie does not have enough cash to pay for the deposannya. The failure of a bank is not necessarily a reality, but can also be a perception (rumor) from some customers.
Before the year 1930-an, 'run on banks' solvency problem and often occurred (last year occurred in 1933 in the USA and the UK in 1957), causing the government control the banks through regulation to ensure that banks have capital and adequate liquidity.
Bank supervisors must ensure that the bank may:
Meet the obligations of the depositor without requesting borrowers pay off loans
Maintain a reasonable level of losses caused by 'poor lending' or declining economic activity, for example, due to economic recession
Initially the capital of a bank associated with the percentage of the loan. Akan but this way there is a 'missing link' in calculating the appropriate level of capital as
In other words' of lending economic 'is a balance between the' margin 'and the losses that might occur → less risk - less margin.
So 'missing link' is over the amount of risk that is owned by a bank.
Financial Services company is an institution that offers financial products to customers such as pension funds, insurance or bonds. Bank, including financial services company.
Risk is the possibility of a loss / natural / results of the ugly (bad outcome) so is the risk of situations that produce negative things and the results can be predicted in advance.
Two terms related to risk:
Risk Event is an occurrence that causes damage or potential for bad outcome.
Risk Loss is loss (financial or non-financial) that occurred as a result of the direct / indirect risk from the event.
Financial services industry is set to protect customers and increase trust in their products so that products are regulated.
Unlike the bank, which is regulated banking institutions themselves, not only the products and services offered. This difference was due to the failure of a bank will give the impact of the old and in to the economy.
Unlike other industries, the bank is not free to determine their capital structure. Capital structure / capital structure is how a bank finance the business, generally through a combination of issuing shares, bonds and loans.
Capital structure is determined by a bank supervisors bank (BI) that determines the minimum capital and minimum level of liquidity that must be owned by banks, as well as the type and structure of loans granted.
When a bank has sufficient capital, banks have financial resources / liquidity is sufficient to mengcover financial losses, so the bank can finance the assets and meet its obligations at maturity. Note: The minimum capital requirement ratio of = Regulatory capital to RWA (BI → ATMR x 8%).
Basel focuses on banking regulation and not in the financial industry as a whole.
Bank must be set as: 1) the risks inherent in the operational activities; 2) offers of money, so that 3) the failure of a bank (total or partial) can cause a "systemic risk".
Systemic risk is the risk of a bank failure which can destroy the economy and the impact on employees, customers and shareholders.
Solvency of a concern not only the bank's shareholders, customers and employees, but also all those responsible for managing the entire economy.
Term systemic risk are closely tied to 'run on a bank' which occurs when the bank can not cover their obligations, ie does not have enough cash to pay for the deposannya. The failure of a bank is not necessarily a reality, but can also be a perception (rumor) from some customers.
Before the year 1930-an, 'run on banks' solvency problem and often occurred (last year occurred in 1933 in the USA and the UK in 1957), causing the government control the banks through regulation to ensure that banks have capital and adequate liquidity.
Bank supervisors must ensure that the bank may:
Meet the obligations of the depositor without requesting borrowers pay off loans
Maintain a reasonable level of losses caused by 'poor lending' or declining economic activity, for example, due to economic recession
Initially the capital of a bank associated with the percentage of the loan. Akan but this way there is a 'missing link' in calculating the appropriate level of capital as
In other words' of lending economic 'is a balance between the' margin 'and the losses that might occur → less risk - less margin.
So 'missing link' is over the amount of risk that is owned by a bank.
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