Irc, Cva and Var - New Methods in Basel

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

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).

The three types of capital mentioned in chapter 18 are, equity capital, economic capital, and regulatory capital. Equity capital, economic capital, and regulatory capital were established a capital standard for banks. Equity capital is defined as the book value of assets less the book value of liabilities. Furthermore, equity capital is also said to cushion debt and equity holders from unexpected losses. Regulatory capital includes the subordinated debt and some adjustments for off-balance sheet items. This is also different from economic capital, which is a statistical estimate of risk and capital, it also reflects the bank’s estimate of the amount of capital needed to support its risk-taking activities; it is not the amount of

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:

According to Barth, Prabha, and Wihlborg (2014), the capital adequacy regulation can result in rapid increase of compliance costs. What’s more, Volcker Rule prohibits proprietary trading, which can damage bank’s hedging capability and threaten bank’s profitability. Those extra regulatory burdens caused by the Act makes it less desirable to be too large.

Under TD Canada Trusts current capital structure, TD’s Tier 1 capital in October 2011 was $28.5 billion which had increased from $24.4 billion in the previous year. TD states that “the increase to Tier 1 capital was largely due to strong earnings, and a common share issuance” TD‘s capital ratios are measured by their financial strength and flexibility, and are calculated using guidelines provided by OFSI for capital adequacy rules including Basel II. OFSI will determine risk-adjusted capital, Risk Weighted Assets, and off-balance sheet exposures through the measurement of capital adequacy amongst the Canadian banks. There are two primary ratios used by OFSI to measure capital adequacy: Tier 1 capital ratio and Total capital ratio (refer to Appendix 2).

Despite this financial intermediary’s immense global success, RBC’s diversified business operations face a significant amount of risk. These risks involve liquidity & funding, market risk, operational risk, foreign exchange risk, insurance, regulatory compliance, strategic risk, competitive risk, as well as credit risk. RBC manages these risks through ensuring that the business activities provide an appropriate risk-return trade-off, while staying within their Risk Appetite. RBC’s specific Risk Appetite is based on four major components and encouraging the types of risk and amount of risk that RBC is willing to take on in order to meet their strategic goals , (See Exhibit 3).

The CIO has asked to change the VaR model, a valuing risk model which a quantification of the short-term market risk of its investments, prior to the incident which later on were found to have errors which helped hide the true volatility and risk of these positions. In addition to that, it has been accepted that JP Morgan’s did not understand the risk associated with the position due to its complexity and larger portfolio base. It is best if stringent measurement could be taken by the company when dealing in such positions.

Credit risk measurement also named as CRM in banking industry, can be noticed in two different standpoints in the bank. It can be the

• 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

To address this deficiency, the Basel Committee on Banking Supervision (BCBS) proposed the post-crisis regulatory capital framework - Basel III, aimed to improve both the quantity and quality of banking organisations regulatory capital and to build additional capacity for loss absorbency into the banking system to withstand markets and economic shocks (BCBS). The importance of capital to a banking organisation cannot be overemphasised, the amount of capital held by a bank determine: (i) the level risk the bank can enter into. (ii) Loss absorbency capacity. (III) The profitability level. (iv) The cost of fund. (v) Investors' confidence, and (vi) the going - concern of the bank. It is vital that banking organisations are able to maintain a balance between their capital risk portfolios. As a result, banks tend to adjust their balance sheet components to achieve an internally set capital

Deregulation, innovation and globalisation has changed the way banks run from asset management to liability management, as well as the change from ‘mono’ to ‘multi-tasking’ and the increased competition in the sector as well as risk. The banking system has evolved drastically from the traditional mono-tasking institution to what it is now. This change in roles of asset and liability management could be one of the main reasons behind the global

The opinion of the author will not be influenced by any respondent including Bank X.

The last decade in the banking industry has seen dramatic losses. Banks that were performing well suddenly experienced a decline due to the credit exposure that the creditors were defaulted, interest rate exposures that is unfavorable fluctuations in interest rates and the banks derivatives exposure that is the miscalculations in banks derivative instruments in the banking

Banks typically need equity and need to make debts to fund loans and other operations. A bank’s indebtedness is primarily composed by deposits, borrowings owed to other banks, and bonds released by the bank itself in the capital market. On the other hand a bank’s equity is determined by subtracting the amount of a bank’s liabilities from the amount of its assets; for a bank, equity largely coincides with capital. Regulation of bank capital is necessary in modern economy because without it a bank could potentially hold very modest capital and in case of losses become insolvent and unable to repay its creditors, including savers and deposit holders. Capital serves as a cushion that should allow banks to withstand even substantial losses without