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.
Monday, July 27, 2009
Capital Requirements in Basel I
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
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