Questions tagged [basel]

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Capital conservation range

What exactly is a capital conservation range according to Basel III? It should be related (possibly equivalent to) a capital conservation buffer or CCoB, which is the amount of common equity tier 1 or ...
Pavel Filip's user avatar
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1 answer
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what is reduced set of risk factors in the context of basel III?

I'm going through the MAR - Calculation of RWA for market risk sections on tps://www.bis.org basel framework page, but not quite understand the reduced set of risk factors. Is it subset of modellable ...
stam's user avatar
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579 views

Rule of Traffic light

I heard that there is a rule called Traffic light from Basel which is used to backtesting the VaR numbers. However I could not find exactly which regulation from Basel mandates that, although I am ...
Brian Smith's user avatar
1 vote
1 answer
95 views

Multiple credit risk mitigation (CRM) treatment in RWA calculation in F-IRB approach Basel II

I have a confusion about how to calculate RWA for a exposure with many types of CRM (says, collaterals and guarantee) in IRB approach. In BCBS128, point 206, "In the case where a bank has ...
Quý Nguyễn's user avatar
1 vote
3 answers
337 views

Square root specification of parameters in factor models

The following formulation is from Vasicek and refers to the cond. probability of the loss of a loan (equ. 3 in the reference): $$p(Y)=\Phi\left(\frac{\Phi^{-1}(p)-\sqrt{\rho}\,Y}{\sqrt{1-\rho}}\right)....
carl's user avatar
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3 answers
246 views

How does the bank uses the provisioning amount and RWA based capital adequacy

As I am new to the banking risk management, I need some clarity on the concept of provisioning and capital adequacy with respect to banking industry. As the banks make loans and some of these loans ...
user51988's user avatar
5 votes
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236 views

Why did the month-end (ir)regularities in Effective Federal Funds Rate (EFFR) disappear in 2018?

The Federal Funds rate has exhibited regular drops at month ends since beginning of 2015. (Source: FRED https://fred.stlouisfed.org/series/EFFR) Some studies (e.g., https://www.mdpi.com/1911-8074/14/...
GZ-'s user avatar
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Why does Basel require Pooled PDs?

Since Basel II requires banks to utilize pooled PDs per rating grade / segment, I wonder why exactly. Via a logistic regression you can directly estimate an obligors PD, why the extra step to pool ...
BaselIRB's user avatar
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1 answer
112 views

Margin Requirement model for CCP and non-central cleared OTC derivatives

What the models for computing margin requirement for central counterparty (CCP) and non-central cleared OTC derivatives.
user460329's user avatar
1 vote
0 answers
158 views

How to calculate contributions to the granularity adjustment

In the Basel pillar 2 framework a granularity adjustment is introduced. While the capital requirements in pillar 1 do not take concetrations into account, this is meant to be covered with this ...
Richi Wa's user avatar
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Regulatory capital requirement for asset sales with recourse in the First Basel Accord

In a BCBS working paper which listed the drawbacks of the first Basel Accord, CAPITAL REQUIREMENTS AND BANK BEHAVIOUR: THE IMPACT OF THE BASLE ACCORD by Patricia Jackson et al., at p. 23, is written: ...
CarLaTeX's user avatar
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1 answer
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Basel compliant Bonds

Recently in India, one of its largest banks issued something called Basel-3 compliant bond. Details here - https://www.business-standard.com/article/finance/state-...
Daniel's user avatar
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4 votes
1 answer
2k views

Use of PIT vs TTC PD in a Merton one-factor model

Under one-factor Merton framework, like Basel, you use unconditional PDs as input of the portfolio model and this "unconditional" means it is a TTC-PD. Given a i-th borrower, the default ...
Nasser Bin's user avatar
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0 answers
80 views

Multi-period Basel/Vasicek formula

I need to apply Basel/Vasicek formula to a 20-years horizon, both from a 20-years cumulative perspective and year-on-year basis. Please find below the formula of the Basel Capital (ie. unexpected loss)...
Nasser Bin's user avatar
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388 views

Difference between Vasicek and Gordy models

I'm trying to understand what Gordy [1] added to Vasicek [2] model (the core of the IRB formula of Basel Accords). Is it correct to say the Vasicek shows that the portfolio loss conditional on $Y$ ...
CarLaTeX's user avatar
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1 answer
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EAD = Drawn amount + Undrawn amount * CCF?

I am pretty sure the following is true $$ \text{EAD} = \text{Drawn Amount} + \text{Undrawn Amount} \times CCF $$ where $\text{CCF}$ is the credit conversion factor. It means if an overdraft line is ...
PalimPalim's user avatar
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What are some robust Contingent Capital Instrument available?

I recently was made aware of the existence of Contingent Capital Instruments like CoCo Bonds. I was wondering if there are other robust options available for Big Banks in this domain?
noisyoscillator's user avatar
1 vote
0 answers
269 views

FRTB Spearman correlation coefficient definition

I am just writing my thesis and would like to understand the spearman correlation coefficient definition within the FRTB. Somehow it is not clear from the definition. The reason what I don't ...
NewNY1990's user avatar
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Derivation of the 99.9% CI to a 1 in a 1000 year event

Keen to understand how BASEL derived the 1 in a 1000 year event from the CI 99.9%: The confidence level is fixed at 99.9% (0.999) (i.e. a bank is expected to suffer losses that exceeds its capital ...
eemrunn's user avatar
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1 answer
74 views

Capital Adequacy Ratio Basel 3

Wanted to understand how Basel arrived at the figure of 8% for capital adequacy . Is it fair to say that if banks maintain CAR, then even if their loan portfolio goes bad, they have enough capital to ...
Shyam's user avatar
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4 votes
2 answers
935 views

Why would Basel III prevent price discovery at credit markets?

I'm referring to this interview with Michael Burry. He says: Central banks and Basel III have more or less removed price discovery from the credit markets. Why would Basel III cause this effect?
BlackNinja's user avatar
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1 answer
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How to calculate value at risk in accordance with Basel?

I would greatly appreciate if you could let me know whether Value at Risk should be calculated for net open position (foreign currency assets-foreign currency liabilities) or for foreign currency cash?...
ebrahimi's user avatar
  • 115
4 votes
1 answer
228 views

Dominating credit risk modeling approaches for capital calculation in banks

In Basel/CRR (capital requirement regulation) there are various approaches for the estimation of capital requirements. For corporate exposures there is the Foundations IRB approach (F-IRBA, own ...
Richi Wa's user avatar
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1 vote
1 answer
263 views

Effects of hedges on counterparty exposure used for RWA computation

In the context of Basel 2 requirements (BCBS128), how hedges affect the computation of counterparty exposure used in RWA calculation? Specifically, do hedges reduce the amount of exposure (EAD)? ...
richpiana's user avatar
  • 113
4 votes
2 answers
3k views

How to add Risks-Not-In-VaR (RNIV) to VaR under Basel III

I am trying to generate/prove the magnitude of the over-conservativeness of the regulatory VaR (internal models) under Basel III against what a more accurate VaR would be. However, I can't seem to ...
Kiann's user avatar
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How to measure specific risk charge?

IFRS requires banks to compute different risks including market risk based on Basel iii. To do so, the capital requirement is defined as follows: $$max(VaR_{t−1},m_c × VaR_{avg}) + SRC$$ $SRC$ is ...
ebrahimi's user avatar
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1 vote
0 answers
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Choosing observations/sample selection in behaviour credit scoring models

In retail banking the credit risk of a creditor after the credit had been granted is often modeled using behavioral credit scoring. In this setting the customer already has an account (or a few) and ...
Richi Wa's user avatar
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0 votes
1 answer
2k views

How is internal risk transfer different than moving from banking book to trading book?

Reading the FRTB paper, I'm not clear on what an internal risk transfer is. To me, it sounds like moving an asset from the banking book to the trading book or vice versa.
AfterWorkGuinness's user avatar
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1 answer
641 views

Calculating the long run average default rate when the portfolio changes during the year

The Basel rules prescribe to calculate a long run average default rate (LADR). It is stated that his rate should be calculated as the average of yearly default rates. A first idea what be: look at ...
Richi Wa's user avatar
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1 vote
1 answer
982 views

Market Risk - Trading and Banking book in light of Basel III

I can not understand whether Basel III (in the part of market risk) applies both to Trading Book and Banking book or just to the first one. I have read that for what concerns Banking book you only ...
Klapaucius's user avatar
1 vote
0 answers
184 views

Explanation and Application of Quantile Regression of Value-At-Risk

Self-learner here. Please, excuse me if I am asking a Question already answered, but the explanations that I find online, just seem to be a bit hard for me. I am currently trying to apply the Basel ...
Kalin.Tsenkov's user avatar
4 votes
1 answer
188 views

Modelling operational risk for Basel pillar 2 (internal model for OpRisk VaR)

I am somewhat familiar with OpRisk for pillar 1. As far as I know OpRisk for pillar 1 will be replaced by standard approaches soon. So what is left is proper modelling in pillar 2. What are best ...
Richi Wa's user avatar
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1 vote
0 answers
34 views

Why do supervisors deem qualified revolving retail less risky than other retail exposure

I would like to gain more understanding of the economic background of some Basel formulas. In the Basel guidelines in retail credit risk we have a risk weight function that depends on the correlation ...
Richi Wa's user avatar
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1 vote
1 answer
781 views

Expected Shortfall Basel III style: what is the idea?

I would like to do a qualitative question about the Expected shortfall in the Basel 3 document. First of all let me introduce few definitions. Suppose to have a portfolio $P$ depending on a family ...
clarkmaio's user avatar
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2 votes
1 answer
1k views

Difference between the Basel IRB and the Vasicek formula

The well known Basel IRB formula is as follows: $${\displaystyle K=LGD*\left[N\left({\sqrt {\frac {1}{1-R}}}*G(PD)+{\sqrt {\frac {R}{1-R}}}*G(0.999)\right)-PD\right]}$$ where the term below is the ...
Konstantin's user avatar
1 vote
0 answers
387 views

Basel Basic CVA Approach Model Foundations

I am working on CVA (credit valuation adjustments). The Basel committee released consultative document reviewing the CVA Risk Framework 'Review of the Credit Valuation Adjustment Risk Framework (2015)'...
Thomas DB's user avatar
1 vote
0 answers
219 views

Liquidity horizons of risk factors categories

I'm reading the consultative document of the BCBS on the Fundamental Review of the Trading Book: http://www.bis.org/publ/bcbs265.pdf Table 2 on page 16 shows the liquidity horizons for 5 broad risk ...
Egodym's user avatar
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4 votes
0 answers
835 views

What is the difference between gross and net enterprise wide risk?

Reading a Basel paper on recommendations on internal economic capital models. One of the recommendations says members of the bank's board should be able to demonstrate understanding of the difference ...
AfterWorkGuinness's user avatar
1 vote
1 answer
284 views

AT1 ratio, Core T1 ration and CET1 ratio

I would like to first know the precise definition of each one of those 3 ratios as well as there differences. On the web there is bit of a mess on the explanations. I could not find a simple and clear ...
Paul's user avatar
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1 vote
1 answer
208 views

regarding Basel II III model

I may have to get involved in some projects using Basel II, III model for risk modeling, to which I have no background. Are there any good book/tutorials to recommend? What are the underlying ...
user785099's user avatar
1 vote
1 answer
388 views

what is General IB2 Restriction in Basel II credit risk model

I was reading Basel II wiki page, it says: The first pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: ...
athos's user avatar
  • 2,231
2 votes
1 answer
126 views

What are the CMG-relevant banks according to Basel III?

I'm going through Basel III monitoring workbook and instruction. There's one row in "General Info -> A) General Bank Data -> 1) Reporting Data" part: "CMG-relevant: Yes/No?" I wonder what does this ...
athos's user avatar
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4 votes
2 answers
486 views

which product supports Basel III LCR (liquidity coverage ratio) reporting?

After Jan 2013 change, now the main reporting changes requested from Basel III is LCR, Liquidity Coverage Ratio. Moody's has a product named RiskAuthority (previously Fermat CAD) that is going to ...
athos's user avatar
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7 votes
2 answers
5k views

Is Unexpected Loss ever used in Basel II?

In Basel II, EL is useful. It's calculated as $$EL = PD \cdot EAD \cdot LGD $$ in advance IRB (internal rate-based approach), Correlation $$R = 0.12 \frac{1 – e^{-50 \cdot PD}}{1 – e^{-50}} + 0.24 ...
athos's user avatar
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10 votes
0 answers
430 views

Basel CVA VaR with R/WWR

In Basel III the CVA VaR “is restricted to changes in the counterparties’ credit spreads and does not model the sensitivity of CVA to changes in other market factors, such as changes in the value of ...
Quartz's user avatar
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4 votes
1 answer
999 views

Is it possible to model general wrong way risk via concentration risk?

General wrong way risk (GWWR) is defined as due to a positive correlation between the level of exposure and the default probability of the counterparty, due to general market factors. (Specific wrong ...
user7056's user avatar
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