The most comprehensive educational resources for finance

A Comparative Assessment of Basel II/III and Solvency II

This reading is a part of the syllabus for FRM Part 2 Exam in the section ‘Operational and Integrated Risk Management’. This is a part of the regulatory readings. In the course of creating a single European market for financial services and in the wake of two financial crises, regulatory frameworks in the financial services

Effective Maturity in Basel II

Under the advanced IRB approach of the Basel II accord, the banks are allowed to develop their own internal models that they can use to measure the capital require for credit risk. Under this model, the banks are allowed to make their own estimation of various components including: the probability of default (PD), loss given

Regulatory Capital Vs. Economic Capital

Unlike a corporation, the role of capital within a bank is not that of an additional source of funding. Banks are primarily deposit taking institutions which then lend this money in the form of loans and other activities. To expand their exposure, it’s fairly easy for a bank to increase their deposit. Instead the capital

Credit Risk Measurement and Management in Trading

BASEL II advises two methods of capital allocation for banks to use to measure credit risk and allocate capital to protect them against such credit risk. They are the standardized approach and the internal rating approach. All financial institutions must based on their size arrive at methods to measure, monitor and protect themselves against credit

Definition of Operational Risk

Operational risk is a very broad concept and it is very difficult to agree on one common definition that fits everyone’s needs. Operational risk primarily focuses on risks arising from failures in processes, systems, and people, and can also include things such as fraud, legal risk, etc. One of the most widely used definitions of

Margin Requirements for Non-centrally Cleared Derivatives

The G20 Leaders agreed in 2011 to add margin requirements on non-centrally-cleared derivatives to the reform programme for over-the-counter (OTC) derivatives markets. Margin requirements can further mitigate systemic risk in the derivatives markets. In addition, they can encourage standardisation and promote central clearing of derivatives by reflecting the generally higher risk of non-centrally-cleared derivatives. The

The Reasoning Behind Basel III

In an interview with Knowledge@Wharton, Wharton finance professor Richard J. Herring discusses the reasoning behind the new capital-adequacy requirements in Basel III, some shortcomings and how the financial services industry will begin to cope with it. For the curious minds, Basel III (also known as Basel 3) is a comprehensive set of reform measures, developed

Understaning Economic Capital

Economic capital is a measure of risk, not of capital held. As such, it is distinct from familiar accounting and regulatory capital measures. Conceptually, economic capital can be expressed as protection against unexpected future losses at a selected confidence level. It is defined as a capital required to absorb the impact of unexpected losses during

Practical Guide to Basel II Implementation: Part 2 of 6

In part 1, we provided a general overview to get started with the Basel II implementation. We will now discuss the factors to be considered in determining the application of Basel II from both a supervisor and a bank perspective. A key objective of Basel II is to encourage improved risk management through the use

Practical Guide to Basel II Implementation: Part 1 of 6

In June 2004, the Basel Committee on Banking Supervision (BCBS) published the document “International Convergence of Capital Measurement and Capital Standards, a Revised Framework” (widely known as Basel II). Basel II aims to build on a solid foundation of prudent capital regulation, supervision, and market discipline, and to enhance further risk management and financial stability.