Capital Buffers and Risk-weighted Assets Under Basel III - METAC

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RWA: COUNTERPARTY RISK• Requirements related to the counterparty risksderived from operations involving derivativesCalculation principle−−No requirements related to the banking book’s credit exposuresRequirements concerning the trading book’s OTC exposure• Calculation of the EAD as regards the exposures according to the methodsdetailed in the following slide• Calculation of the counterparty risk in accordance with the IRB credit riskapproach or the institution’s standard credit risk approach.K = EAD x RW x 8%EAD = exposure at default (IRB) or exposure amount (standardized approach)RW = risk weight calculated as a function of PD, LGD and, in some cases,maturity for IRB approach or with regulatory coefficient for standardizedapproach.29
RWA: COUNTERPARTY RISK• Counterparty risk: EAD (as an item of information)Current exposure method Standardized method Internal modelling to estimateEADMethod EAD is the currentreplacement cost (RC) morean add-onEAD = RC + add-onUnder this method, banksmust calculate the currentreplacement cost by markingcontract to market, thuscapturing the currentexposure without any needfor estimation, and adding afactor (“the add-on”) to reflectthe potential future exposureover the remaining live of thecontract.Add-on for single name creditderivatives (notional amount xcoefficients set in para 707).See para 708 Basel II for n-to-default credit derivativeprudential treatment.EAD is the max of:• the sum of current netmarket value and• the sum of absolutevalues of net riskpositions i (notionalamount times modifiedduration) compensatedwith other positions foreach maturity bucket andthen multiplied by a creditconversion factor (0.3%for credit default swap)Multiplied by a coefficient β=1,4EAD is calculated as theproduct of alpha timeseffective EPE:EAD = α x effective EPEEffective expected positiveexposure is the weightedaverage over time of effectiveexpected exposure over thefirst year (differently ifcontracts mature before oneyear). Therefore banks haveto specify the forecastingdistribution for changes in themarket value to the changesin market variables.α= 1,4 or higher at thediscretion of the supervisor.The use of internal modellingis subject to prior validationby the bank’s supervisor.Source: Author’s own; BCBS30
Page 2: INTRODUCTION:REFORMS• Overview of
Page 6: CAPITAL STRUCTURE• Ratio’s cali
Page 10: CAPITAL BUFFERS• Ratio’s calibr
Page 13 and 14: CAPITAL CONSERVATION BUFFER• The
Page 15 and 16: COUNTERCYCLICAL BUFFER• Countercy
Page 17 and 18: COUNTERCYCLICAL BUFFER• Extension
Page 19 and 20: COUNTERCYCLICAL BUFFER• Illustrat
Page 21 and 22: RISK-WEIGHTED ASSETS• Strengtheni
Page 23 and 24: RWA: SECURITIZATIONS• The prudent
Page 25 and 26: RWA: MARKET RISKS• Increase in ca
Page 27 and 28: RWA: MARKET RISKS• Standardized a
Page 29: QUESTIONS• What are the three new
Page 33 and 34: RWA: COUNTERPARTY RISK• Counterpa
Page 35 and 36: SOLVENCY RATIO IMPACT• ImpactSour
Page 37 and 38: HOW TO COPE WITH SUCH NEWREQUIREMEN

Capital Buffers and Risk-weighted Assets Under Basel III - METAC

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