18 votes
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Why do banks have capital requirements on deposits?

When someone deposits money at the bank, it immediately appears on the balance sheet as both, an Asset and a Liability: on the liability side, it will sit as something along the lines of "deposit ...
Jan Stuller's user avatar
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16 votes
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Does banks' profitability really suffer under low interest rates

A simple correlation/beta analysis of the Banks-relative-to-market versus interest rates or bond yields will tell you that the effect is real enough, whether in Europe, the US, or Japan... Likewise, a ...
demully's user avatar
  • 5,041
16 votes

Cheatsheet/summary of financial laws and regulations

Here's a few. The categories are not mutually exclusive (e.g. since most investment advisors are obviously affected by tax and short-selling). Investment advisors Investment Advisers Act of 1940 ...
madilyn's user avatar
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12 votes
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How is the formula for the VEV (VaR-equivalent volatility) in the PRIIP document derived?

Let's assume T=1 and let S be a geometric gaussian process with zero drift, i.e. $\ln(S_1/S_0)$ is normally distributed with mean $-1/2\times\mathrm{VEV}^2$ and volatility VEV. Then $$\ln(\mathrm{...
Robert Schlichtner's user avatar
9 votes
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Forecasting non-maturity deposits with machine learning

This boils down to timeseries forecasting which is particularly challenging for financial data because finance exhibits all the things that makes forecasting hard: non stationary, low signal to noise, ...
David Duarte's user avatar
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9 votes

Why do banks have capital requirements on deposits?

This is an answer from European perspective. As @JanStuller has explained a retail cash deposit results in two balance sheet entries. In the simplest form: (Liability) Customer Demand Deposit, e.g. €...
Attack68's user avatar
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6 votes
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99.97% Percentile VaR Approximation

The 99.97% confidence is somtimes referred to as corresponding to the 1-year probability of default of 3 bps for AA-rated entities. (Here for example https://papers.ssrn.com/sol3/papers.cfm?...
Mats Lind's user avatar
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6 votes

Does banks' profitability really suffer under low interest rates

Simplified: Banks usually live of the margin between what interest people pay fro credit vs. what interest people get for leaving their money with the bank. The higher the difference between the two, ...
Falco's user avatar
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5 votes
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Banking. What's the difference between provision and capital adequacy regulations? (purpose-wise)

Sort of. (But I don't really like the way you put it). The purpose of capital adequacy regulations is to protect the depositors (and senior creditors). The capital is a kind of "cushion" that ...
Alex C's user avatar
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5 votes

Why do banks have capital requirements on deposits?

Afaik and as Jan Stuller already mentioned, banks have to meet requirements to the Leverage Ratio, which gets mandatory with CRR II in 2021. For simplicity, most banks will have to meet a minimum of 3%...
simzoor's user avatar
  • 383
4 votes

Forecasting non-maturity deposits with machine learning

Responding to the first question and building on Dimitri's comments, it is probably worth your while to do some due-diligence on the some of the standard issues that come up in Financial ML and see to ...
Sharad's user avatar
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3 votes
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Are Indices Regulated

I believe that Basel Accords are not directly imposed on banks. Instead they are global recommendations. But in practice, all national financial regulators (e.g. FCA in UK) adopt Basel guidelines as ...
Attack68's user avatar
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3 votes
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CCAR Shocks Scenario

"1) Whether the shocks to Vol points are in % or bps. For example, for Australia bump to 1M vol is 16.2, so is this 16.2% of original Vol or it is a bump of 16.2 basis points to the original vol?" ...
Daneel Olivaw's user avatar
3 votes

Banking. What's the difference between provision and capital adequacy regulations? (purpose-wise)

Short answer - banks make loans, and obviously some of these will go wrong. This risk is handled in two separate ways (that are distinct; but obviously not independent of each other). If you had to ...
demully's user avatar
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3 votes
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What is curvature risk?

The formulae are on p17 of the document attached to the link you included. http://www.bis.org/bcbs/publ/d352.pdf It's just the profit or loss due to a specified shock in the underlying, which is not ...
dm63's user avatar
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3 votes

How is the formula for the VEV (VaR-equivalent volatility) in the PRIIP document derived?

To answer this question it might make sense to mention the VaR part and VEV part separately. VaR example using a parametric approach to VaR: assuming an investment of $V_0 = 10,000 $ into the ...
Олег Бойко's user avatar
3 votes

Why do banks have capital requirements on deposits?

Another problem is the bank's GSIB score. There are about 10 components that go into the GSIB score calculation, but one of them is (bank equity)/(balance sheet). Having a poor GSIB score means the ...
JoshK's user avatar
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3 votes

Why do banks have capital requirements on deposits?

Apologies if this answer is a bit off the beaten track. The reason capital requirements are imposed on deposits is historical. In the United States they were introduced by Alexander Hamilton (1755-...
nbbo2's user avatar
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3 votes

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

Q1 does not make sense. Bank capital is not "invested" in a specific asset such govt securities. Bank Capital is concerned with the Sources (not the Uses) of the bank's funds and is the ...
nbbo2's user avatar
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2 votes

Question regarding the Category 3 PRIIP MRM calculation

Actually, it is not very clear the legislation. However, from some slides that EIOPA used in a conference I tried to build back their computation and what I found is that: 1) you simulate 10k with ...
Thegamer23's user avatar
2 votes
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Approach to add scenarios to OpRisk loss distribution

The problem is not the sum $L + L_1$ but the question whether your $L_1$ is really a good model for whatever you might be missing in $L$. I personally (and maybe also some regulators) would regard ...
g g's user avatar
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2 votes
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EBA Stress Test Arbitrage

I would not be surprised that you can perform some regulatory arbitrage by mean of little financial engineering as you suggest, see for example: https://www.risk.net/our-take/7046041/in-stress-test-...
raptor22's user avatar
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2 votes

Does banks' profitability really suffer under low interest rates

Yes of course. They pay billions in interest to the central bank (ECB) and that consumes most of the profit they make on lending it out. European banks in particular are struggling to turn profitable....
AndiAna's user avatar
  • 163
2 votes

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

High level Answer: Trading Book: All the books held in Capital Markets or Investment Banking Division of a Bank. Instruments will include:Swaps, Stocks, Bonds, etc. Banking Book: All the books held ...
Varun's user avatar
  • 21
2 votes

Core Deposits when modelling Non-Maturity Deposits according to IRRBB

This is more of a practital answer, but I've seen an approach by a medium-sized bank (balance sheet about 60 billion), which is already ECB-proof and which might answer your question: In a nutshell, ...
simzoor's user avatar
  • 383
2 votes

Risk-Weighted assets and Risk Weight

In my experience, the RWA is an output, and the risk-weight & EAD are inputs. So you first compute the EAD for each customer's portfolio. There are different ways to compute the RWAs. As you point ...
Jan Stuller's user avatar
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2 votes
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Liquidity assessment for OTC derivatives

Assuming you're using "bank" in generic reference to any buy-side account (not a market marker), I'd say there are 3 primary ways to asses liquidity. I think it's important to note that in ...
Thomas Boyd's user avatar
2 votes

What is Day One Profit and why is it a matter/important?

Day One Profit (DOP) refers to the immediate gain or loss that a bank or financial institution realizes upon entering into a financial transaction, such as a derivatives contract or a loan. It's an ...
Hans-Peter Schrei's user avatar
1 vote
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How to calculate bid/ask spread for an index?

You can't get Bid/Ask for an index. To get a proxy for this, either use a futures instrument (that generally has a lead-lag relation with the index, but replicates the index) on that index or use a ...
Phantom's user avatar
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