Banking - capital requirements: Pillar I Flashcards
What is pillar I of the three Basel pillars?
Minimum capital and liquidity requirements
Explain the first pillar of Basel pillars
The goal is financial satiability
It sets out minimal capital requirements to meet potential losses caused by credit-, market- or operational risk and also minimum liquidity requirements
What is the minimum capital requirement according to pillar 1?
total capital ration at least 8%
How do you calculate if the total capital ratio and what dose it have to be?
TCR = Own funds/risk-weighted exposure amounts >= 8%
How is the definition of own funds in regards to pillar I
Its not equity in the classical sense
own funds are tier 1 capital + tier 2
What are tier 1 assets?
They can be split in 2
Common equity tier 1 and additional tier 1 capital
Taking into account the definition of own funds in regards to pillar I is there neccesary split that has to be achieved in regards to tier 1 and tier 2 assets?
Yes, tier 1 has to be at least 6%
Common equity capital ratio at least 4,5%
how do you calculate the risk weighted exposure assets to insert into the TCR formula?
Credit risk + market and operational risk * 12,5
What is credit risk?
The risk that a bank will incur losses because a counterparty does not pay back a loan.
different types of assets have different risk-weighting depending on the inherent, potential credit risk
Loans to governments are 0% for example while housing loans can be 35%
how does the standardized approach work in regards rating methods and risk weight?
I believe the icelandic banks use the standardized approach
you get external rating - credit info for example
and the risk weight is prescribed
for example:
A+ rating
100 USD loan
risk wight for A+ is 50%
the risk weighted asset is therefore 50
50x8% = 4,0
What is market risk?
Risk that a bank incurs losses on positions arising from movements in traded assets for example. commodity prices, bonds, stocks and such
What is operational risk?
Risk that a bank incur losses from inadequate or failed internal processes, people or systems, or external events.
The standardized approach for minimal capital requirements here is that a bank is split into 8 business lines and the the minimum requirement would be 12%, 15% or 18% of gross income of each line
