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Performance analysis of banks BASEL norms

These rule written by the bank of international settlements committee of banking supervision (BCBS)

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

Objectives

     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.

 

Preventing measures.

     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.

 

     Developing countries.

 

     Face difficulties.

 

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:

 

Micro prudential

 

Macro prudential..

 

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 )

 

    Fixed percentage

 

KBIA=[∑(GI1.n *α)]/

 

Advantages:

   Simple and transparent

 

   readily available

 

 

   Risk.

 

   Standardised approach:

 

   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:

 

HISTORICAL SIMULATION:

    Risk factor level

 

    Replacing the security

 

    Measure  VAR

 

MONTE CARLO SIMULATION:

    Estimate VAR

 

    Revaluating the all position of portfolio

 

    More time consuming.

 

PARAMETRIC SIMULATION:

    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.

    Scenario analysis:-

 

Risk factors simultaneously.

    Maximum loss:-

 

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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