Basel 2 is the second Basel after Basel Accords known as Basel 1. By using Basel 2 in Australia, APRA (Australian Prudential Regulation Authority) aims to arrange Australian Prudential standards with worldwide guidelines. The purpose of Basel 2 is to make better arrange regulatory capital with the single risk profiles of financial institutions, a bank with greater exposure to the risk of peers who will hold more capital, while the less exposed to the risk that will hold less capital. Picture 1.1 Picture 1.1 shows that Basel 1 (Accord) has a risk-weighted at one hundred percent with $100 loan to the corporate entity and a total capital charge of $8. Beside that, through a standardized approach of Basel II, the corporate entity is rating …show more content…
As banks become more innovative in their statistic techniques and methods, they are encouraged to look at the more risk a sensitive approach that is related (capital reduction) incentives. Third, credit risk means financial institutions are allowed to choose from one of Standardization approach that uses risk weighting standards and external assessment if available, or the Internal Ratings-Based (IRB) approach that uses data from internal risk management systems. A securitization framework should be use for banks to involve in traditional and synthetic securitizations or similar structures. Fourth, market risk details the risk engaged in trading book roles and treatment of counterparty credit risk so as to effectively catch event and standard risk for trade-debt and equity equipment. Fifth, operational risk defined as " the risk of direct or indirect loss comes from the inability or failure of internal processes, people and techniques or from exterior events ”. 14 Banking organizations are offered three methods for determining operational risk capital expenses including the Basic Signal Approach, the Standard Approach, and the Advanced Measurement Approach (AMA). The supervisory review process (Pillar 2) is generally known as the ‘supervisory review process’ but it enforces responsibilities on both managers and banks. It needs banks to have a process and strategy for evaluating and keeping their overall capital adequacy in regards to their risk
The idea of “risk” is used in many fields and industries. There has been large efforts made towards the understanding of risk. Since, risk varies so much depending on the field of study, the need for learning about it is warranted. As can be imagined, the importance of risk in a market economy is crucial. In the 1990s, JP Morgan made the Value at Risk (VaR) a central component of its work efforts (Cecilia-Nicoleta, Anne-Marie, & Carmen-Maria, 2011).
A community bank is exposed to different types of risks. Hazard or pure risks may or may not result in loss and are, generally, insured, whereas, financial risks are external threats with the potential to affect the bank’s objectives. For the CRO, managing various types of risks is essential for the overall profitability of the bank. To minimize the effect of hazard and financial risks, the CRO will implement ERM or traditional risk management processes to create a program for risk management.
Basel III is a global comprehensive collection of restructured regulatory standards on bank capital adequacy and liquidity. It was developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector (bis.org, 2010). It introduces new regulatory requirements on bank liquidity and bank leverage in response to the financial downturn caused by the Global Financial Crisis. Stefan Walter, Secretary General of the Basel Committee on banking supervision said in November 2010:
Credit risk consists of three parts: the size of the exposure at the time of default, the probability of default occurring, and the loss if the credit event occurs (Fraser & Simkins, 2010). Undoubtedly, a combination of a clear strategy, a knowledge of analytical tools, an understanding of the risk management instruments, responsible oversight, and the ability to be intuitive is crucial to risk management (Bethel, 2016). Wells Fargo is one of the most successful banks in the United States in managing risk. Successfully, they have navigated through risk by choosing a course of action determined by their risk management process (Perez, 2014).
Investment Banking is now at a crucial junction, where Investment and Commercial Banking are splitting up due to the ring fence which is being built around these two banking areas. As well, the new upcoming regulation, Basel III, will have a huge impact in the investment banks, with higher liquidity and capital requirements, in order to increase solvency and stability in financial industries.
The Dodd-Frank Act utilizes several different measures to determine the level of systemic risk in the financial system. Regulators are encouraged to consider the following criteria when assessing the systemic risk of a firm (pgs. 131-132):
For further prepositions from the Corporation Act the regulations of financial institutions servers throughout a licensing and disclosure regime. Anyone who carries a financial service business in the country must hold an Australia financial service license (AFSL) issued by the Australian Security and Investment Commission
Financial regulation is highly significant to a nation in order to maintain the integrity of a financial system by creating guidelines for banks, brokers and investment companies. The financial regulatory authorities within Australia include: The Reserve Bank of Australia (RBA), Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA), the Australian Treasury and the Council of Financial Regulators (CFR). These institutions play an important role in Australia’s economy, responsible for consumer protection and the regulation of investment banks and finance companies.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, banks with total consolidated assets of more than $10 billion is required to conduct annual stress tests and the Board of Governors of the Federal Reserve System published its final stress test rule (12 CFR 252) which provided definitions and rules concerning scope, scenarios, reporting and disclosure. This rule continues to be a focus by the regulators to ensure banks are in
But rather must perform comprehensive financial and economic analysis to ascertain the risk involve and the level they can take (Murray & Andrew, 1998: Chartered Institute of Bankers, 2015; 1994; Ishola,
• Interest rate risk: Evaluating management of interest rate risk including the ability to accurately identify and quantify interest rate risk in assets and liabilities under varying model
The primary measure used by regulators and analysts to measure a bank’s capital strength is the Tier 1 capital ratio. Analyzing this ratio indicates the strength and the bank’s ability to
In order to effectively treat risk, firms must first apply a risk management framework and process. The enterprise-wide risk management process provides a broad approach to address and manage all of an organizations risk. Furthermore, this technique is comprised of four components, lead and establish accountability, align and integrate, allocate resources, and communicate and report. When implemented together these components are the essential to achieving an organizations goals. Moreover, five risk management steps reinforce the enterprise-wide framework process and begins with scanning the environment, identifying the risks, analyzing the risks, treating the risk and lastly, monitoring the risks to ensure they are being controlled and eliminated (Elliott, 2012). Banks in particular have a variety of risks which can be addressed using enterprise-wide risk management techniques. For example, ABC Community Bank would be subject to a number of financial risks, including interest rate risk, liquidity risk, credit risk and price risk. With just 30 employees and one location, the organization is small and the company’s ability to absorb financial risks and survive is improbable. Therefore, the organization must take the necessary steps to address the company’s financial risks to ensure continuous survival and goal achievement.
Although IRC helps bank to capture risks more effectively, especially when market and credit risks collide, there is a significant weakness still be existing. It is the overlap of counterparty credit risk cooperated with over the counters (OTC) and repo-style transactions between IRC and CVA (Stretton, 2011). As a consequence, it will lead to duplicate capital charge for the banks. Suggested by Linsz (2010) – the corporate Treasurer of Bank of America, the Committee should apply an integrated approach to combine the overlapping risks by deleting the risk above in IRC model, hence build up more accurate capital charge for banks. In fact, Bank of America thinks duplicated capital charge is inappropriate with risk management practices (Linsz, 2010).
The New Basel Capital Accord (Basel II) requires financial institutions to develop a comprehensive loss distribution so that they can more accurately estimate their risk profile and reserve requirements. In particular, Basel II adds operational risk to the traditional categories of credit risk and market risk that are currently used to estimate capital requirements.