TEST CASES ELABORATION PROCESS

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TEST CASES ELABORATION PROCESS

• Andrés Álvarez Vázquez
• University of Oviedo

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CALCULATION OF MINIMUM CAPITAL REQUIREMENTS

• CREDIT RISK
• The Standardised Approach
• (2 test cases)
• The Internal Ratings-Based Approach (1 test case)

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REFERENCES

• BANK FOR INTERNATIONAL SETTLEMENTS
• BASEL COMMITTEE ON BANKING SUPERVISION
• INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT
  AND CAPITAL STANDARDS (BASEL I)
• INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT
  AND CAPITAL STANDARDS A Revised Framework
  (BASEL II)

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REFERENCES

• EUROPEAN UNION
• RE-CASTING DIRECTIVE 2000/12/EC OF THE EUROPEAN
  PARLIAMENT AND OF THE COUNCIL OF 20 MARCH 2000
  RELATING TO THE TAKING UP AND PURSUIT OF THE
  BUSINESS OF CREDIT INSTITUTIONS AND COUNCIL
  DIRECTIVE 93/6/EEC OF 15 MARCH 1993 ON THE
  CAPITAL ADEQUACY OF INVESTMENT FIRMS AND CREDIT
  INSTITUTIONS
• (PARTS 1 AND 2 AND ANNEXES TECHNIQUES)

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COMMON PROBLEMS

• Difficulties for non-specialist in banking
  operations
• Information required development of our own
  cases
• For banks
• Data collection process
• High costs

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THE STANDARDISED APPROACH

• Credit risk measurement in a standardised manner,
  supported by external credit assessments

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THE STANDARDISED APPROACH

• Claims on sovereigns OECD country risk
  classification

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OECD CREDIT RISK CLASSIFICATION
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THE STANDARDISED APPROACH

• Other exposures
• ECAIs risk classification (Standard Poors)
• Credit risk set in Directive

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THE STANDARDISED APPROACHFilling the templates

• Exposure Value
• -Value Adjustments and Provisions
• Exposure Net of Value Adjustments and
  Provisions

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THE STANDARDISED APPROACHFilling the templates

• FULLY ADJUSTED EXPOSURE VALUE (E) CALCULATED AS
  SET IN DIRECTIVE
• E max 0, (?(E) - ?(C)) ?(net position in
  each security x Hsec) (?Efx x Hfx)
• IN OUR TEST CASES NO CREDIT RISK MITIGATION
  TECHNIQUES HAVE BEEN USED, SO
• E EXPOSURE NET OF VALUE ADJUSTMENTS AND
  PROVISIONS

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THE STANDARDISED APPROACHFilling the templates

• OUR TEST CASES ON-BALANCE SHEET ITEMS
• RISK WEIGHTED EXPOSURE AMOUNT CALCULATED AS A
  PERCENTAGE OF E

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THE STANDARDISED APPROACHFilling the templates

• RISK WEIGHTS ACCORDING TO ANNEX VIII OF THE
  DIRECTIVE
• CAPITAL REQUIREMENTS 8 x RISK WEIGHTED
  EXPOSURE AMOUNT

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THE STANDARDISED APPROACHFilling the templates

• SIMPLE CASES
• PROBLEMS
• - CRM TECHNIQUES E
• - OFF-BALANCE SHEET ITEMS

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THE STANDARDISED APPROACHFilling the templates

• LEGAL REFERENCES AND COMMENTS IN THE TEMPLATES

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THE IRB APPROACHFilling the templates

• COMPETENT AUTHORITIES MAY PERMIT CREDIT
  INSTITUTIONS TO CALCULATE THEIR RISK-WEIGHTED
  EXPOSURE AMOUNTS USING THE INTERNAL RATINGS BASED
  APPROACH
• CREDIT INSTITUTIONS SYSTEMS FOR THE MANAGEMENT
  AND RATING OF CREDIT RISK EXPOSURES ARE
  IMPLEMENTED WITH INTEGRITY AND IF THEY MEET THE
  STANDARDS SET IN DIRECTIVE, ANNEX VII

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THE IRB APPROACHFilling the templates

• CREATION OF OBLIGOR RATING SCALE
• SEVEN GRADES ONE MORE FOR PAST-DUE (minimum
  number of grades)
• OBLIGOR GRADE risk category within a rating
  systems obligor rating scale to which obligors
  are assigned

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THE IRB APPROACHFilling the templates

• AVERAGE PD ASSIGNED TO THE OBLIGOR GRADE (minimum
  0.03)
• EXPOSURE WEIGHTED AVERAGE LGD 45
• MATURITY VALUE (M) 2.5 YEARS
• RISK WEIGHT

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THE IRB APPROACHFilling the templates
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THE IRB APPROACHFilling the templates

• LEGAL REFERENCES AND COMMENTS IN THE TEMPLATES
  (IRB Ref List)
• Exposure weighted average LGD ()
• Annex XII, Part 3, paragraph 14 e.ii)
• (DISCLOSURE REQUIREMENTS)

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THE IRB APPROACHFilling the templates

• LEGAL REFERENCE
• ANNEX VIII Credit Risk Mitigation
• PART 3 Calculating the effects of CRM
• Par. 62 LGD Max 0, LGD x (E/E
• (no CRM in test case 03)

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TEST CASES ELABORATION PROCESS

• INFORMATION REQUIRED
• TEMPLATES REFERENCE LIST COMMENTS