Basel III, Risk Assessment and Stress Testing
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Basel III, Risk Assessment and Stress Testing Course
Introduction:
Basel III is a global regulatory standard on bank capital adequacy, stress testing, and market liquidity risk. It requires banks to use quantitative methods for risk projection and economic capital forecasting, and report results across the organization. Basel III is the third set of reform measures agreed upon by the Basel Committee on Banking Supervision.
In this course, there will be an in-depth analysis of why stress testing is vitally important to financial institutions, how to conduct stress testing, and why financial regulators are so preoccupied with stress testing in the post-2008 financial environment.
In particular, there will be an analytical examination of the kinds of scenarios that can lead to extraordinary credit losses, operational losses, and liquidity stress and can even threaten the survival of financial institutions.
This course is designed as an intermediate-level in-depth look at the key provisions of the Basel III regulatory framework, the ongoing risk assessment practice within banks, and the vital role of stress testing.
Upon completion, participants will have a comprehensive understanding of internal risk assessment as required under Basel III especially concerning the ICAAP process.
Course Objectives:
At the end of Basel III, Risk Assessment and Stress Testing Course, participants will be able to:
- Develop a deep understanding of the key elements within the Basel III regulatory framework
- Understand the key metrics and procedures for assessing credit risk, market risk, and operational risk
- Understand the vital importance of stress testing as the cornerstone of risk management
- Apply analytical skills for the identification of the concentration of credit risk, the concentration of funding risk, and systemic liquidity risk
- Develop and formulate procedures and policies concerning the best practice implementation of stress modeling and associated risk management protocols
Who Should Attend?
This Basel III, Risk Assessment and Stress Testing Course is suitable for:
- All those working in the banking industry, including wealth managers, auditors, and treasury and product control professionals.
Course Outlines:
Understanding The Role Of Regulatory Bank Capital
- Overview of financial statements of banks – accounting principles
- Composition of the balance sheet – types of assets and liabilities
- Understanding the key elements of the P&L – statement of income
- Review of the distinction between the banking book and the trading book
- The equity capital of financial Institutions
- Illustration of the contrast between liquidity and solvency issues
- Distinguish between going concern and gone concern capital
- Explanation of bail-in able capital
- Accounting and regulatory definitions for own funds
- Prudential filters and revaluation reserves, AOCI
- Treatment of goodwill, intangibles, deferred tax assets
- Treatment of securitizations and off-balance sheet exposures
Requirements for Qualifying Capital under Basel III
- Definitions of Regulatory Capital – Core Tier 1, Tier 2
- Core Tier 1 – equity capital and disclosed reserves
- Supplementary Capital – Tier 2 – subject to the discretion of supervisor/central bank
- Revaluation reserves – limitations
- Hybrid capital – equity-like e.g. perpetual preferred shares
- Subordinated debt instruments – criteria and restrictions
- Short-term subordinated debt covering market risk (Tier 3)
- Loss of absorbency requirements
- Deductions from the capital – goodwill and subsidiaries
- Supervisory discretion over cross-holdings of other banks
Basel Treatment of Market Risk
- Value at Risk (VaR) – rationale, theory, and methods of calculation
- Limitations of parametric VaR
- What about tail risk – does VaR capture this adequately?
- Risk weightings for market risk
- Standardized approach
- Interest rate risk in both the trading book and banking book
- Overview of Internal Models Approach (IMA)
- Impact of market risk on instruments in the trading book
- Volatility and market stress
- Incremental Risk Charge
- Off-Balance Sheet items
Operational Risk under Basel
- Definition of Operational Risk introduced into the Basel II framework
- The Life Cycle of Operational Risk
- Basel measurement approaches:
- - Basic Indicator
- - Standard Approach
- - Advanced Measurement Approaches
- Risk weightings under each approach
- Rogue trading – the severity of losses
- Scenario generation – KRI’s, management involvement in adverse scenario modeling
- Quantifying the exposure and severity of “outliers” and tail risk
- Loss Distribution Approach (LDA) and Scenario Based Analysis (SBA)
- Application of VaR techniques to operational risk (Op VaR)
- Loss identification – measurement, management, monitoring, reporting
- Integrating operational risk management into the organizational risk management framework
Alternatives to using external credit ratings
- Developing internal scoring models for assessing corporate loan exposures
- The contrast between developed and emerging economy approaches to credit risk assessment
Credit Concentration Risk and Large Exposures
- Concentration risk – not adequately captured under the Pillar One approaches
- A summary of the Supervisory Review and Evaluation Process (SREP)
- Treatment of Concentration Risk within the Pillar II ICAAP Framework
- Identifying sectoral concentration risk – general principles
- Quantifying concentration risk in GCC
Modeling and Stress Testing
