Basel II - Measuring and Managing Credit Risk
Duration:
2 days
2 days
Location:
Prague, Mövenpick Hotel
Prague, Mövenpick Hotel
- General Introduction to Credit Risk and Basel II
- Measuring Credit Risk under Basel II
- Standardized Approach to Measuring Credit Risk
- Foundation and Advanced Approaches
- Internal Rating Models
- Treatment of Collateral and Credit Derivatives
- Practical Implementation Issues
The purpose of this seminar is to give the participants an in-depth understanding of and “hands-on” experience with the Basel II principles for measuring credit risk.
We will start with a brief, overall introduction to credit risk and to the Basel II framework and its “Three-Pillar Approach”. We will give an account of the historical development of Basel I and II, and will discuss consequences of Basel II for banks and corporations, as well as for the global financial system.
We will then explain in detail the different approaches to measuring credit risk. Firstly, we will look at the standardized approach, explaining the general rules of applying external ratings to bonds, loans and other assets. Numerous examples will be used to show how regulatory capital is calculated.
Moreover, we will give an in-depth explanation of the two “Internal Ratings-Based” approaches, Foundation and Advanced. In each case, we explain and illustrate the relevant mechanics of the different approaches and demonstrate how the risk weights are derived for corporate, sovereign, bank, retail and equity exposures. We will also look at how the individual risk components such as “Probability of Default” (PD), “Loss Given Default” (LGD), “Exposure at Default” (EAD) and “Effective Maturity” (M) are calculated for different on-balance as well as for off-balance instruments.
We will then look at the treatment of risk mitigation techniques such as collateral and credit derivatives. Finally, we will discuss some practical aspects of the functioning of Basel II, including systems and data requirements and the regulatory review process. We will also discuss how Basel II can be integrated into an overall ERM framework and how you can actually make money from Basel II “compliance”.
We will start with a brief, overall introduction to credit risk and to the Basel II framework and its “Three-Pillar Approach”. We will give an account of the historical development of Basel I and II, and will discuss consequences of Basel II for banks and corporations, as well as for the global financial system.
We will then explain in detail the different approaches to measuring credit risk. Firstly, we will look at the standardized approach, explaining the general rules of applying external ratings to bonds, loans and other assets. Numerous examples will be used to show how regulatory capital is calculated.
Moreover, we will give an in-depth explanation of the two “Internal Ratings-Based” approaches, Foundation and Advanced. In each case, we explain and illustrate the relevant mechanics of the different approaches and demonstrate how the risk weights are derived for corporate, sovereign, bank, retail and equity exposures. We will also look at how the individual risk components such as “Probability of Default” (PD), “Loss Given Default” (LGD), “Exposure at Default” (EAD) and “Effective Maturity” (M) are calculated for different on-balance as well as for off-balance instruments.
We will then look at the treatment of risk mitigation techniques such as collateral and credit derivatives. Finally, we will discuss some practical aspects of the functioning of Basel II, including systems and data requirements and the regulatory review process. We will also discuss how Basel II can be integrated into an overall ERM framework and how you can actually make money from Basel II “compliance”.
Standardized Approach to Measuring Credit Risk
- General Rules
- Individual claims
- External credit assessments
- Credit Risk Mitigation
- Overview of Credit Risk Mitigation Techniques
- Collateral
- On-balance sheet netting
- Guarantees and credit derivatives
- Maturity mismatches
- Workshop: Using the standardized approach
12.00 - 13.00 Lunch
13.00 - 16.30 The Internal Ratings-Based Approach
- Overview
- Mechanics of the IRB Approach
- Categorization of exposures
- Foundation and advanced approaches
- Adoption of the IRB approach across asset classes
- Transition arrangements
- Foundation Approach: Rules for Corporate, Sovereign and Bank Exposures
- Risk-weighted assets
- Risk components (PD, LGD, EA and M)
- Foundation Approach: Rules for Retail Exposures
- Risk-weighted assets for retail exposures
- Risk components
- Workshop: Estimating Risk Components and Capital Charge under the Foundation approach
Day Two
09.00 - 09.15 Brief recap
09.15 - 12.00 The Internal Ratings-Based Approach (continued)
- Advanced IRB Approach: Minimum Requirements
- Advanced IRB Approach: Rules for Corporate, Sovereign and Bank Exposures
- Risk-weighted assets
- Risk components (PD, LGD, EA and M)
- Advanced IRB Approach: Rules for Retail Exposures
- Risk-weighted assets for retail exposures
- Risk components
- Workshop: Estimating Risk Components and Capital Charge under the Advanced IRB approach
- Treatment of Equity Exposures under IRB
- Treatment of Purchased Receivables under IRB
- Recognition of Guarantees and Credit Derivatives under IRB
- Recognition of Provisions under IRB
12.00 - 13.00 Lunch
13.00 - 16.00 Practical Implementation Issues and Outlook
- Systems and Data Requirements
- Special Discussion: How are risk components estimated when there are no liquid stock markets or historical data?
- Organization, Procedures and Skills
- Complying with the minimum requirements
- Regulatory review process (“Pillar II”)
- Managing/Optimizing the Capital Ratio
- Integrating Basel II into an ERM Framework
- Making money from Basel II compliance
- Discussion: How Has Basel II Affected the Banking Markets?
- Who have been the losers and winners?
- How will the three pillars function in the future?
- Critiques of Basel II: Rules too complex and prescriptive?
Evaluation and Termination of the Seminar
