16

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 simple multiple regression of bank equity to the equity market and to swap rates will also suggest that the rates beta is almost as significant, sometimes more ...


16

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 owned to customers", and on the Asset side as "cash" (this is just regular "double entry accounting"). If the bank then lends part of ...


14

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 Investment Company Act of 1940 SIPA of 1970 ERISA of 1974 JOBS Act of 2012 Europe Criminal Justice Act 1993 Financial Services Act 1986 Financial Services Act ...


11

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 $$\ln(\mathrm{VaR}/S_0) = -1/2\mathrm{VEV}^2 - \mathrm{VEV} \times 1.96$$ with the VAR at $0.975$ quantile. This is a quadratic equation in VEV, with solutions $$\mathrm{VEV}...


9

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, etc. In the case of forecasting deposits, I very much doubt that you will be able to get satisfactory results even if you do manage to figure out all the ...


9

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. €100 (Asset) Central Bank Deposit, e.g. €100 Capital Requirements The asset can be transformed to other forms but according to Capital Requirements Regulation ...


6

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?abstract_id=963233 ) The normal approximation works better for general securities portfolios than for credit portfolios and might thus be seen as good enough from a ...


6

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, the more money is left for the bank. Before the last crisis banks increased this margin by high risk investments, which promised higher interest rates. Several ...


5

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%. Important note: riskweights do not play a role here. That's why the leverage ratio is decreasing when customers put their money to the banks, leading to ...


4

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 protects the creditors if assets go bad. The purpose of provision regulation is to make sure that the capital figures are accurate: as soon as losses are predicted ...


4

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 what extent they apply to your problem: Interpretability: How will you interpret the results of your Deep Learning model and share them with users/decision ...


3

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 minimum standards. Regulation does change across borders since national regulators can impose stricter or different rules to Basel. Also areas that are not ...


3

"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?" The shocks are in percentage points: for example if Australian 1M vol is 21.0%, the CCAR shocked 1M vol will be 21.0% + 16.2% = 37.2%. "2) This is to just ...


3

Please look at the 16 December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability and related FAQs "Basel III definition of capital - Frequently asked questions" like bcbs 211.


3

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 explained by the local delta of the position.


3

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 financial asset and its daily log return following a normal distribution such that $r_t \backsim N(\mu, \sigma^2)$ with mean $\mu=0.02$ and standard deviation $\sigma =...


3

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 bank will have to a surcharge assessment on it's balances. So in other words, if a bank just takes in more deposits - and does nothing with them - the leverage ...


3

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 (1755-1804) who was knowledgeable about British banking practices. In the 18th century people understood that banking can be dangerous. The failure of Law's Bank in ...


2

The bank in china has to have an account at an intermediary bank, and order a transfer from that account to the account of the US bank. Therefore the chinese bank needs to have the dollars.


2

No, 9th character is computed using deterministic algorithm described here: http://en.wikipedia.org/wiki/CUSIP#Check_digit_pseudocode.


2

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 losses always equal to 10K and completely independent from everything else not to be a good model for the low frequency high severity events typically missing from ...


2

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-window-dressing-timing-is-everything. In principle, why wouldn't you be allowed to take such a market position? It is a default of the regulatory approach. In ...


2

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.


2

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 in Commercial or Retail Banking Division of a Bank. Instruments will include:Loans to corporates, Bank Guarantees, etc. Market Risk Measure: Sensitivities like ...


2

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 sum up the distinction in single-sentence bullet points: Provisions try to pre-book expected/likely losses on the current loan book. Capital Adequacy (CAR) ...


2

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, you can apply a dynamical replication approach, which tries to find the optimal portfolio consisting of fixed assets that you have to invest to archive a margin ...


1

The ECB can get you Eurosystem-wide aggregates, but remember that these are just reported by the ECB by the national central banks, who actually regulate the banks. The rules and reporting standards are Europe-wide; but this is nationally operated. And the precise figures for every individual bank are commercially-sensitive data. I'm not sure they are a ...


1

Merton model has been highly criticized in academic literature for its accuracy, though it provides good ranking of credit risk, it fails to quantify it. I'd say use machine learning or better yet deep learning. I used a recurrent neural network with time series inputs like amount due and changing monthly income among many more. It provided a good estimate ...


1

Taken from my experience as a trader I would suggest there are two parameters that comprise OperationalRisk: 1) A distribution of the size of losses due to the event, 2) A distribution of the frequency of events. I suspect a Poission distribution is fine to use to predict the frequency. Empirically this would tally with my experience. Secondly, with regard ...


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