Brief Overview of Events before and During the Banking Crisis
- Securitisation and the mortgage markets
- CDO markets, super senior tranches, the chase for yield, and the role of the rating agencies
- Gain-on-Sale accounting and mark-to-market valuation
- Reliance on whole-sale funding and the creation of funding liquidity risk
- Use of structured investment vehicles and implicit support
- Impact on the interbank markets
- Limitations in stress testing
- Deficiencies in senior and risk management oversight
This section will be reinforced with some case-studies discussing what happened in specific organizations such as Sachsen LB, Royal Bank of Scotland, Halifax Bank of Scotland, as well as the US investment banking sector generally.
Changes to Capital itself
- What are some of the major problems with the current definition?
- Was capital truly loss absorbent?
- An outline of the proposed changes
- Concept of going and gone concerns
- Removal of hybrid securities
- Introduction of Common Equity Tier 1 and Additional Tier 1
- Regulatory adjustments
- Elimination of Tier 3 and harmonisation of Tier 2
- Contingent convertibles and similar structures
- Introduction of the bail-in clauses and PONV for all capital
- What happened during the Cypriot crisis
- Harmonisation with IFRS
- Final percentages and the transition timetable
- Conservation Capital Buffer
- Why is the current Accord procyclical and what are the dangers?
- How the CCB will work
- Counter-Cyclical Capital Buffers
- The broad intention and the current proposals?
- Early warning signs of a boom-bust cycle
- Estimation of credit to GDP and other measures for each jurisdiction
- Estimation of capital buffers
- Home-host responses
- Systemically Important Banks global, regional and domestic
- What is the overall likely impact on the banking business mode
- A view from the Bank of England
Changes to the Regulation of Market and Credit Risk
- Why has traded market risk been highlighted as requiring attention?
- Reviewing the boundary between baking and trading some proposals
- Reinforcement to the approval process for internal models
- Introduction of Stressed VaR
- How is this to be calculated?
- What is the estimated impact?
- Reminder: the use of external credit ratings in the Standardised Approach
- Proposals to remove the ECRAs
- What has the US done the 3-indicator approach
- Introduction of the Incremental Risk Charge to replace Issuer Specific Risk
- What are the broad requirements?
- Netting and other mitigation
- Specifying and implementing the liquidity horizon
- An overview of credit portfolio modelling, including both default and migration, to estimate the IRC
- Criticisms of the IRC, and modification back to IRDC
- Estimation of a capital charge for counterparty credit risk (CCR)
- What is the current state? Background to the existing formula
- Introduction of the Credit Valuation Adjustment (CVA)
- How to model expected positive exposure
- The comprehensive risk approach
Practical applications: There will be computer demonstrations to reinforce how the calculations may be performed
- Centralised clearing for OTC derivatives
- How is the credit default swap market operating?
- Lessons to be learnt
- Incentives and disincentives to centrally clear
- What are the current Basel proposals?
Changes to the Securitisation Framework
- What went wrong, and what are the broad intentions?
- Dodd-Frank Act of July 2010
- Recalibration of the Supervisory Formula
- Specific risk charges and SF charges
- The IOSCO Code of Conduct
Multi-Dimensional Risk Measures
- Is capital the only mitigant?
- Introduction of a leverage constraint
- Background: the US experience
- Why a leverage constraint is required: the Swiss view
- What is proposed how is it likely to work?
- Potential impact on activities such as Trade Finance
- The overall timetable for parallel running and future calibration
- Should this move into Pillar 1?
Introduction of a Liquidity Framework
- Funding liquidity: what happened during the crisis?
- Estimation of the Liquidity Coverage Ratio
- What are eligible liquid assets?
- Estimation of run-offs as revised in 2013
- The supervisory stress test
- Estimation of the Net Stable Funding Ratio
- Current 2014 proposals
- Impact on long-term funding of infrastructure projects
- The supervisory stress test
- Changes to the timetable
- Regulatory metrics to estimate liquidity
- New monitoring tools
Other Changes to Pillars 2 and 3
- Increased focus with Pillar 2
- Changing emphasis for the ICAAP
- How the SReP may be adjusted
- Revised disclosure requirements under Pillar 3
- Changes to margining
- Possible changes to accounting provisioning
- Speed of national implementation
Basel III and CRD IV
- What are the main differences
- Why stress test? What are the recent lessons?
- How was stress testing viewed prior to 2007?
- What happens in times of stress?
- What constitutes a good stress test?
- What are the management messages from stress tests?
- Senior management responses to stress tests
- Regulatory stress tests: results from 2010 and 2011 European tests
- Lessons from the crisis
- Getting the basics right
- Continual risk monitoring
- Enhanced oversight the role of the Board Risk Committee
Changes to the Supervisory Process
- Introduction of Risk-Based Supervision
- How will this change the supervisory process
- What changes are required within the banking supervisory
Overall Impact on the Banking Business Model
- Likely changes to the banking product mix
- Likely changes to pricing
- Summary: some political views on Basel III
- Will we have a Basel IV?
Summary of Course