7_2-Basel%20Committee%20Recomendations.pdf

7/28/2019 7_2-Basel%20Committee%20Recomendations.pdf

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Basel Committee

Recommendations


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Framework

Amendment to Capital Accord to incorporate market risk

1996

Application of Basel II to trading activities and the treatment

of double default effects

2005

Comprehensive version of Basel II Framework

2006

Consultative documents on revisions to Basel II market risk

framework and the guidelines for computing capital for

incremental risk in trading book

2008


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Basel Committee On Banking Supervision (BCBS)

Provision of capital cushion for price risk

Arising from trading activities

Flexible bank models

Compliance with qualitative criteria

Compliance with quantitative criteria

Market risk measure (Value-at-Risk (VaR))

Standardized measuring framework


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Reserve Bank of India Initiatives

Capital requirement for market risk

Risk weight of 2.5%

Investments in Government and other approved

securities

Risk weight of 100% Open position limits in forex and gold

Small banks

Standardized method

Large banks and international banks

Internal models


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Basel II Guidelines

Capital requirement for trading book positions

Requirement of banks to model specific risk to measureand hold capital

Against default risk

Incremental default risk charge in the trading book

Exposure in banks trading books to credit-risk

Holding of illiquid products

Other risk not reflected in value-at-risk

Consideration of vide range of incremental risks

Emphasize on improvement of internal value-at-risk

models for market risk

Prudent valuation guidance

Positions held by banks at fair value


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Internal Value-at-Risk Models

Justify factors used in pricing

Calculation procedure of value-at-risk

Hypothetical back testing

Validation of Value-at-Risk model

Relevant market data Market data collection interval at monthly or lesser

intervals

Use of weighting methods for historical data

Maintain effective observation period for modelperformance for at least one year

Conservative capital charge


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Standardized Measurement Method for Market risk

Apply a higher specific risk charge to instruments with

high yield to maturity

Disallow offsetting between instruments with high yield to

maturity and any other debt instruments

Defining the extent of market risk


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Specific Risk Capital

Standardized Approach (External Credit Rating)

Credit

Assessment

AAA- to AA- A+ to A- BBB+ to BBB- BB+ to BB- Bellow BB-

A-1 / p-1 A-2 / P-2 A-3 / p-3 Below A3/p3

Un rated

Securitized

exposure

1.6% 4% 8% 28% Deduction

Re- Securitized

exposure

3.2% 8% 18% 52% Deduction


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Internal Rating Based Approach

Interest Rating Securitized exposure Re- Securitized exposure

Senior

granular

Non - Senior

granular

Non - granular Senior Non - Senior

AAA / A1 / p1 0.56% 0.96% 1.60% 1.60% 2.40%

AA 0.64% 1.20% 2.00% 2.00% 3.20%

A+ 0.80% 1.44% 2.80% 2.80% 4.00%

A / A - 2 / p - 2 0.96% 1.60% 2.80% 3.2% 5.20%

A- 1.60% 2.80% 2.80% 4.80% 8.00%

Note:

granular-effective number of underlying exposure is 6 or more

Non - granular - effective number of underlying exposure is les then 6


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Internal Rating Based Approach

Note:

granular-effective number of underlying exposure is 6 or more

Non - granular - effective number of underlying exposure is les then 6

Interest Rating Securitized exposure Re- Securitized exposure

Senior

granular

Non - Senior

granular

Non - granular Senior Non - Senior

BBB+ 2.80% 4.00% 8.00% 12.00%

BBB /

A3 / p - 3

BBB

4.80% 6.00% 12.00% 18.00%

8.00% 16.00% 28.00%

BB+ 20.00% 24.00% 40.00%

BB -1 34.00% 40% 52.00%

BB -1 52.00% 60.00% 68.00%

Below BB - /A-3

/ p3

Deduction


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Specific Risk Charge for Unrated Exposure

Supervisory formula

Bank has approval for the Internal Rating Based Approach

for the asset classes Minimum requirements when probability of default and loss

given default estimated

Bank has approval for using a value-at-risk measure for

specific market risk

Approval of products or asset classes

Standards for calculating the incremental risk capital

8% of weighted average risk multiplied by a concentration

ratio

Concentration ratio

Sum of the nominal amounts of all tranches divided by the

sum of the nominal amounts of the tranches junior to the

tranche in which the position is held


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General Criteria

Banks risk management system is conceptually sound

Risk management system is implemented with integrity

Bank has in the supervisory authoritys view sufficient

number of skilled staff

Bank is capable of applying sophisticated models

Trading area Risk control

Audit

Back office area

Banks models have a proven track record of reasonableaccuracy in measuring risk

Bank regularly conducts stress tests


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Qualitative Standards

Independent risk control unit

Responsible for design and implementation of the banks

risk management system

Prepare and analyse daily reports on the output of the

banks risk measurement model

Evaluate the relationship between measures of risk

exposure and trading limits

Independent from business trading units

Report directly to senior management of the bank


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Conduct a regular back-testing programme

Ex-post comparison of the risk measure generated by

the model against actual daily changes in portfolio value

over longer periods of time

Hypothetical changes based on static positions

Conduct the initial and on-going validation of the internal

model

Active involvement of Board of directors and senior

management

Deployment of significant resources to risk management


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Close integration of internal risk measurement model

with the day-to-day risk management process of the

bank

Documentation set of internal policies

Provide an explanation of the empirical techniques used

to measure market risk


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Indirect Review of Market Risk System

Adequacy of the documentation of the risk management

system and process Organisation of the risk control unit

Integration of market risk measures into daily risk

management

Approval process for risk pricing models

Valuation systems used by front and back-office

personnel

Validation of any significant change in the risk

measurement process


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Indirect Review of Market Risk System

Market risk captured by the risk measurement model

Integrity of the management information system

Accuracy and completeness of position data

Verification of the consistency, timeliness and reliability of

data sources Independence of data sources

Accuracy and appropriateness of volatility and correlation

assumptions

Accuracy of valuation and risk transformation computations

Verification of the accuracy of the model


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Quantitative Standards

Value-at-risk computed on a daily basis

Consideration of a 99 percentile, one-tailed confidence

interval

Computation of an instantaneous price shock equivalent

to a 10 day movement in prices

Minimum holding period at ten trading days

Historical observation of data for a minimum period of

one year


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Capture the non-linear price characteristics of options

positions

Apply a 10 day price shock

options positions

positions that display option-like characteristic

Adjustment of capital measure for options risk

periodic simulations

stress testing


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Specification of risk factors that captures the volatilities of

the rates and prices underlying option positions

Vega risk

Delta risk

Gama risk

Rho risk

Banks with relatively large and/or complex options

portfolios to disclose detailed specifications of the relevant

volatilities broken down by different maturities


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Capital Requirement

Higher of its previous days value-at-risk number

Average of the daily value-at-risk measures on each of

the preceding sixty business days

Multiplied by a multiplication factor

Higher of its latest available stressed-value-at-risk

number

Average of the stressed value-at-risk numbers over the

preceding sixty business days

Multiplied by the same multiplication factor


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Capital Requirement Formula

( : )-1

( :-1 )

-1

,

C Max V R m V Ra t b a avg

Max V R m V Ra t a avg

V R previous day V Ra t a

V R Average daily V Ra avg a

m multiplication factor sV R stressed V Rb a a

V R Average stressed V Ra avg a

`


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7_2-Basel%20Committee%20Recomendations.pdf

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