TEST CASES
ELABORATION
PROCESS
Andrés Álvarez Vázquez
University of Oviedo
1
CALCULATION OF
MINIMUM CAPITAL
REQUIREMENTS
CREDIT RISK


The Standardised Approach
(2 test cases)
The Internal Ratings-Based
Approach (1 test case)
2
REFERENCES
BANK FOR INTERNATIONAL SETTLEMENTS
BASEL COMMITTEE ON BANKING SUPERVISION
INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT
AND CAPITAL STANDARDS (BASEL I)
INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT
AND CAPITAL STANDARDS – A Revised Framework (BASEL
II)
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REFERENCES
EUROPEAN UNION
RE-CASTING DIRECTIVE 2000/12/EC OF THE EUROPEAN
PARLIAMENT AND OF THE COUNCIL OF 20 MARCH 2000
RELATING TO THE TAKING UP AND PURSUIT OF THE
BUSINESS OF CREDIT INSTITUTIONS AND COUNCIL
DIRECTIVE 93/6/EEC OF 15 MARCH 1993 ON THE CAPITAL
ADEQUACY OF INVESTMENT FIRMS AND CREDIT
INSTITUTIONS
(PARTS 1 AND 2 AND ANNEXES TECHNIQUES)
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COMMON PROBLEMS



Difficulties for non-specialist in
banking operations
Information required:
development of our own cases
For banks:
* Data collection process
* High costs
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THE STANDARDISED APPROACH

Credit risk measurement in a
standardised manner,
supported by external credit
assessments
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THE STANDARDISED APPROACH
Claims on sovereigns:
OECD country risk
classification
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OECD CREDIT RISK CLASSIFICATION
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THE STANDARDISED APPROACH
Other exposures:
ECAIs risk classification
(Standard & Poor’s)
Credit risk set in
Directive
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THE STANDARDISED APPROACH
Filling the templates
Exposure Value
-Value Adjustments and
Provisions
= Exposure Net of Value
Adjustments and Provisions
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THE STANDARDISED APPROACH
Filling the templates
FULLY ADJUSTED EXPOSURE VALUE (E*)
CALCULATED AS SET IN DIRECTIVE
E* = max {0, [(∑(E) - ∑(C)) + ∑(|net position in
each security| x Hsec) + (∑|Efx| x Hfx)]}
IN OUR TEST CASES: NO CREDIT RISK
MITIGATION TECHNIQUES HAVE BEEN USED,
SO:
E* = EXPOSURE NET OF VALUE ADJUSTMENTS
AND PROVISIONS
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THE STANDARDISED APPROACH
Filling the templates
OUR TEST CASES: ONBALANCE SHEET ITEMS
RISK WEIGHTED EXPOSURE
AMOUNT CALCULATED AS A
PERCENTAGE OF E*
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THE STANDARDISED APPROACH
Filling the templates
RISK WEIGHTS ACCORDING
TO ANNEX VIII OF THE
DIRECTIVE
CAPITAL REQUIREMENTS =
8% x RISK WEIGHTED
EXPOSURE AMOUNT
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THE STANDARDISED APPROACH
Filling the templates
•
•
SIMPLE CASES
PROBLEMS:
- CRM TECHNIQUES
E*
- OFF-BALANCE SHEET ITEMS
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THE STANDARDISED APPROACH
Filling the templates
LEGAL REFERENCES AND
COMMENTS IN THE
TEMPLATES
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THE IRB APPROACH
Filling the templates
COMPETENT AUTHORITIES MAY PERMIT
CREDIT INSTITUTIONS TO CALCULATE
THEIR RISK-WEIGHTED EXPOSURE
AMOUNTS USING THE INTERNAL
RATINGS BASED APPROACH
CREDIT INSTITUTION’S SYSTEMS FOR
THE MANAGEMENT AND RATING OF
CREDIT RISK EXPOSURES ARE
IMPLEMENTED WITH INTEGRITY AND
IF THEY MEET THE STANDARDS SET IN
DIRECTIVE, ANNEX VII
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THE IRB APPROACH
Filling the templates
•
•
CREATION OF OBLIGOR RATING SCALE
SEVEN GRADES + ONE MORE FOR PASTDUE (minimum number of grades)
OBLIGOR GRADE: risk category within a
rating system’s obligor rating scale to
which obligors are assigned
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THE IRB APPROACH
Filling the templates
•
•
•
AVERAGE PD ASSIGNED TO THE OBLIGOR
GRADE (minimum 0.03%)
EXPOSURE WEIGHTED AVERAGE LGD
45%
MATURITY VALUE (M) 2.5 YEARS
RISK WEIGHT
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THE IRB APPROACH
Filling the templates
Asset class:
LGD:
Maturity
Turnover
OBLIGOR (millions of €)
GRADE PD:
1
2
3
4
5
6
7
PAST-DUE
0,03%
1,00%
2,50%
4,00%
6,00%
10,00%
15,00%
100,00%
Corporate
exposures
45%
Other retail
exposures
45%
2,5 years
50
15,00%
95,00%
120,00%
140,00%
160,00%
190,00%
220,00%
550,00%
4,00%
45,00%
60,00%
65,00%
70,00%
90,00%
100,00%
130,00%
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THE IRB APPROACH
Filling the templates
LEGAL REFERENCES AND COMMENTS IN THE
TEMPLATES (IRB Ref List):
Exposure weighted average LGD* (%)
Annex XII, Part 3, paragraph 14 e.ii)
(DISCLOSURE REQUIREMENTS)
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THE IRB APPROACH
Filling the templates
LEGAL REFERENCE:
ANNEX VIII: Credit Risk Mitigation
PART 3: Calculating the effects of CRM
Par. 62: LGD* = Max {0, LGD x [(E*/E]}
(no CRM in test case 03)
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TEST CASES ELABORATION
PROCESS

INFORMATION REQUIRED

TEMPLATES REFERENCE LIST
& COMMENTS
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