Exam_vP Flashcards
(6 cards)
What is Marginal VaR?
How much risk an individual asset (or position) adds to the overall Value at Risk (VaR) of a portfolio.
The change in total portfolio VaR caused by a small increase in the size of a particular asset or position.
Leverage ratio
Leverage ratio is the other new liquidity ratio introduced under Basel III. LR focuses on short-term, on a 30-day period of acute stress. Acute stress is defined as the following:
* Three-notch downgrade
* Drawdown on credit line
* Partial loss of deposits
* Complete loss of wholesale funding
* Increased haircuts on secured funding
The leverage ratio is about whether the bank’s high-quality liquid assets are sufficient to survive 30-day of high-cash flow period. The requirement for the LR is to be at least 1.
Net Stable Funding Ratio
The financial crises taught us that we need to worry about liquidity risk. If a bank has a high mismatch between its short-term funding and its long-term lending the bank can get in severe liquidity problems under a crisis, which was what, we among other things, saw under the financial crisis in 2008-2009.
Based on this experience two new liquidity ratios were introduced in Basel III, Leverage ratio and Net Stable Funding ratio.
One of these is the Net Stable Funding ratio (NSFR). The NSFR is a long-term liquidity measure, and is designed to ensure that stability of funding sources is consistent with the performance of the assets that have to be funded.
The numerator is calculated by multiplying each category of funding (liabilities) by an Available Stable Funding Ratio and the denominator by multiplying each category of required funding by the Required Available Funding Ratio.
The more stable a given funding type is, the higher the AFS factor is. As for the required funding, the less stable funding an asset requires, the lower the RFS factor is.
According the Basel III, NSFR needs to be at least 1.
Which weaknesses in the Basel I approach have Basel II taken care of in respect to credit risk?
Basel I completely ignores the credit-rating of the loans. I.e. loans to companies with a AAA
rating require the same amount of capital as loans to companies with a C-rating. The same holds
true for banks and countries. This weakness is dealt with under Basel II.
What is the intuition of the historical simulation approach?
The historical simulation approach uses past data as a guide to what will happen in the future, and the basic idea is that every day in the historical data set is a possible outcome for tomorrow. In particular, we will use that every return price in the historical data set is a possible outcome for the return of tomorrow.
