Performance analysis of banks BASEL norms
These rule written by the bank of international settlements committee of banking supervision (BCBS)
How to assess risks, and how much capital to set aside for banks in keeping with their risk profile.
o tier one capital + tier two capital
Ø CAR= risk weighted assets
To strength soundness and stability of banking system
To protect depositors and promote the stability and efficiency of financial systems around the world.
Basel I Norms
Ø Maintain minimum capital adequacy requirement.
Basel II Norms
Ø banking laws and regulation.
Risk based capital(pillar I)
The first pillar sets out minimum capital requirement.
Measurement and risk.
Measure operational risk and market risk.
2.Risk based supervision
To help better management technique.
Assess overall capital adequacy.
Supervisor evaluate capital adequacy.
Banks to operate minimum capital adequacy.
Risk to disclosure to enforce market discipline (pillar III)
It imposes strong incentives to banks to conduct their business in a safe , sound ,and effective manner.
Criticism of Basel II norm
Not suit for difficult situation
Examination or evaluation and supervisors.
BASEL III NORMS
To create an international standard that banking regulators can use when creating regulationabout how much capital banks need to put aside to guard against the types of financial and operational risks banks face.
Basel III is a comprehensive set of reform measures, developed by the Basel committee on banking supervision, to strengthen the regulation, supervision and risk management of the banking sector.
Improve the banking sectors ability to absorb shocks arising financial and economic stress whatever the sources
Improve risk management and governance
Strengthen banks transparency and disclosures.
The reforms target:
The overall goals of basel III norms are:
To refine the definition of bank capital
Quantify further classes of risk
To further improve the sensitivity of the risk measures
Measurement of operational risk:
The frame work from the committee presents three methods for calculating minimum capital charge operational risk under pillar1:
The basic indicator approach
The standardised approach, and
The advanced measurement approach(AMA)
Basic indicator approach:
Average annual gross income (net interest income+ net non interest income )
Simple and transparent
Annual gross income per business line
Several indicators – size or volume of banks activities in a business line, where banks
activities are divided into eight business lines:
Risk factor level
Replacing the security
MONTE CARLO SIMULATION:
Revaluating the all position of portfolio
More time consuming.
VAR estimation directly from the standard deviation
VaR=market price *volatility
Volatilities and correlations are calculated directly from users specified start and end dates Stress testing
Marketing value of a portfolio varies due to movement of market parameters such as interests rates ,market liquidity, inflation , exchange rate , stock prices , etc…….,
Techniques of stress testing
Simple sensitivity test:-
Short term impact of portfolio value.
Risk factors simultaneously.
identifying the most potentially damaging combination of moves of market risk factors
STEPS FOR STRESS TESTING
Step-1: Generate Scenarios`
Step-2: Revalue portfolio.
Step-3: Summarize results.
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