International Regulation of Banking by Gleeson, Simon -- Read -- Imperial Library of Trantor

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Index

Cover Page

INTERNATIONAL REGULATION OF BANKING

Title Page Copyright Page Dedication

PREFACE

Contents—Summary Contents—Detailed Tables of Legislation List of Abbreviations PART I The Elements of Bank Financial Supervision

Chapter 1. Introduction to Banks and Banking A. Banks Considered as Risk Takers B. A Prototypical Bank Business summary Risk analysis Credit risk Market and asset liquidity risks Funding liquidity risk Interest rate risk Operational risk Risk consolidation Economic capital Chapter 2. Why Are Banks Supervised? A. Basis of Bank Supervision—the Basel Principles B. Capital Regulation C. The Constraints on Bank Capital Regulation D. The Quantum of Bank Capital Requirements E. Does the Banking Crisis Prove that Risk Capital-based Regulation Failed? Quantitative risk modelling and the crash F. Market Crisis and Regulation G. Protecting the Public from the Consequences of Bank Failure Bank resolution regimes Chapter 3. Basel and International Bank Regulation A. The Basel Committee and the Basel Accord B. Addressing Failures of Multinational Banks C. International Institutional Co-operation in Bank Regulation Chapter 4. Basel III A. Policy Responses to the Crisis B. Basel 2.5 Trading book reform Stress testing Pay and bonuses C. Basel III Strengthening the global capital framework Enhancing risk coverage Leverage ratio Countercyclical buffers Systematic interconnectedness Systemic risk Introducing a global liquidity standard Monitoring tools Addressing reliance on external credit ratings and minimizing cliff effects Enhanced counterparty credit risk management requirements Stress testing Implementation and transitional arrangements Chapter 5. The Bank Capital Calculation—Basel II A. The Basic Bank Capital Calculation B. What is Capital? C. The Bank Capital Hierarchy D. Capital Monitoring E. ‘Gearing’ Rules F. The Components of Capital G. Tier 1 Issuance Redeemability Permanence Power to defer payments Loss absorption Subordination Moral hazard Associate transactions Reserves Share premium account Externally verified profits Innovative tier 1 Convertible and exchangeable instruments Deductions from tier 1 H. Tier 2 Upper tier 2 Lower tier 2 Upper tier 2 requirements Lower tier 2 requirements Provisioning and expected loss I. Deductions Qualifying holdings (holdings in non-financial undertakings) Material holdings (holdings in financial undertakings) Connected lending of a capital nature Expected losses and other negative amounts Securitization positions J. Tier 3 Upper tier 3 Lower tier 3 Deductions from tier 3 K. Capital Arising from Revaluation of Assets L. Deductions for Investment Firms M. Bank Capital Resources—Summary Table Chapter 6. The Bank Capital Calculation—Basel III A. The Calculation of Bank Capital under Basel III Core tier 1 capital Tier 2 capital Bank holdings in banking, financial, and insurance entities Basel III and capital requirements

PART II Commercial Banking

Chapter 7. Credit Risk A. Background B. Risk Weighting of Assets C. The Basel Approaches D. Valuation of Exposures E. Mark to Market Financial assets at fair value through profit or loss Available-for-sale financial assets Loans and receivables Held-to-maturity investments other than loans and receivables Chapter 8. The Standardized Approach A. Classification of Exposures, Credit Conversion Factors, and Credit Risk Mitigation B. Ratings and Rating Agencies C. Exposures to Sovereigns Regional governments or local authorities Public sector entities Multilateral Development Banks (MDBs) D. Exposures to Banks and Financial Institutions E. Exposures to Corporates F. Exposures to Retail Customers Retail mortgage lending G. Commercial Mortgage Exposures H. Overdue Undefaulted Exposures I. High-Risk Exposures J. Covered Bonds K. Securitization Exposures What is a securitization? Tranching Performance dependent payment Subordination Securitization and the specialized lending regime Weighting of securitization positions—standardized approach Asset backed commercial paper L. Short-Term Claims on Financial Institutions and Corporates M. Fund Exposures N. Other Assets O. Off-Balance Sheet Items Chapter 9. Model Based Approaches to Risk Weighting A. Introduction to the Basel Risk Model B. VaR and the Basel Framework C. The Basic Basel Formula Maturity adjustment Default tail Consequences D. Putting It All Together E. The Retail Exposures Formula F. Translating between Capital Requirements and Risk Weightings G. Model Types H. Illustrative Risk Weights I. Modelling in Practice J. Variations in Credit Risk Weightings between Firms K. Inputs and Outputs The ‘use’ test The meaning of default Validation of PD estimates Loss given default Exposure at default L. Becoming an IRB Firm Eligibility for the IRB approach Corporate governance Chapter 10. The Internal Ratings Based Approach A. Corporate, Sovereign, and Bank Exposures PD LGD Downturn LGDs B. Exposure at Default Netting and EAD Commitments—when should a CF/EAD be applied? Maturity Basel III and Financial Sector Exposures under IRB—the Asset Value Correlation multiplier Highly leveraged counterparties Basel III, LGD, and EAD C. Specialized Lending D. Retail and Mortgage Exposures Retail exposures Specialized retail exposures Default in the retail portfolio E. Eligible Purchased Receivables F. Equity Exposures The simple risk weight approach for equity The PD/LGD approach for equity The internal models approach for equity Chapter 11. Netting, Collateral, and Credit Risk Mitigation A. Introduction B. Netting On balance sheet netting Off balance sheet netting and master netting agreements C. Collateral The simple approach The comprehensive approach Haircuts Secured lending transactions Government repo market concession D. Unfunded Credit Protection Effect of unfunded credit protection Multiple default credit derivatives

PART III Investment Banking

Chapter 12. The Trading Book A. Introduction B. Trading Book Eligibility Trading book eligibility under Basel 2.5 C. Trading and Market Exposures Position risk requirement Interest rate PRR Position netting Notional legs Specific risk General market risk D. Equity PRR and Basic Interest Rate PRR for Equity Derivatives Standard equity method Standard equity model—specific risk Standard equity method—general market risk Simplified equity interest rate PRR E. Commodity PRR The simplified approach The maturity ladder approach The extended maturity ladder approach F. Foreign Currency PRR G. Option PRR The option standard method Options on funds H. Annex—A Guide to Option Terminology Chapter 13. Securities Underwriting Chapter 14. Trading Book Models A. ‘CAD 1’ Models B. VaR Models C. The Multiplication Factor D. Basel 2.5 Stressed VaR The incremental risk charge (IRC) Securitization positions in the trading book Correlation trading Chapter 15. Credit Derivatives A. Introduction B. Notional Positions C. Recognition of Risk Reduction D. Nth-to-default Chapter 16. Counterparty Risk A. Introduction B. Credit Derivatives C. Collateral in the Trading Book D. Double Default in the Trading Book E. Rules Common to Banking and Trading Books Unsettled transactions Free deliveries F. Basel III and CCR Counterparty credit risk General wrong-way risk Credit Value Adjustment—the ‘bond equivalent approach’ Collateralized counterparties and margin period of risk Downgrade triggers Collateral management Securitization and resecuritization collateral Chapter 17. Counterparty Credit Risk for Derivatives, Securities Financing, and Long Settlement Exposures A. Introduction B. Calculating Exposures C. The Mark to Market Method PFE calculation Netting within the mark to market method D. The Standardized Method E. Credit Risk Exposure Calculation F. The CCR Internal Model Method Contractual netting within the CCR regime CCR models and securities financing transactions Chapter 18. Securitization and Repackaging A. Introduction B. What is a Securitization? C. True Sale and Derecognition of Assets ‘Derecognition’ for synthetic securitizations Implicit support, or ‘de-derecognition’ D. Risk Weighting of Securitization Exposures E. Weighting Holdings of Securitization Positions—the Standardized Approach Liquidity facilities F. The IRB Approach The ratings based approach The supervisory formula approach The ABCP IAA G. Revolving Credit Securitizations Treatment of the originator’s share H. Securitization and Basel III Resecuritization Self-guarantees Standardized approach resecuritization risk weights Credit analysis

PART IV Other Risks

Chapter 19. Operational Risk Requirements A. Operational Risk B. The Basic Indicator Approach C. Standard and Advanced Measurement Approaches—Criteria for Use D. The Standardized Approach—The Charge E. Advanced Measurement Approach—The Charge F. Corporate Governance and Operational Risk Chapter 20. Concentration and Large Exposures A. The Large Exposures Regime B. Exposure C. Counterparty Connected counterparties Total exposure D. Exposure Limits Parental guarantees Collateralization Advanced IRB firms Treasury concession Intra-group securities financing transactions National integrated groups The UK Integrated Group

PART V Basel III Requirements

Chapter 21. Liquidity Requirements A. Liquidity Supervision B. Qualitative Supervision of Liquidity C. Quantitative Supervision of Liquidity—pre Basel III The simplified ILAs liquid assets buffer Contents of the liquidity pool Cross-border and intra-group management of liquidity D. Liquidity under Basel III The two requirements Liquidity Coverage Ratio The net stable funding ratio Chapter 22. The Leverage Ratio A. The Leverage Ratio B. Transitional Arrangements Chapter 23. Basel III, Derivatives, Clearing, and Exposures to CCPs A. Exposures to Central Counterparties B. Summary of the Proposed Reforms The proposed CCP framework Default fund exposures

PART VI Bank Group Supervision

Chapter 24. Group Supervision A. Introduction Solo supervision Consolidated supervision Conglomerate supervision B. Consolidated Supervision C. Scope of Consolidation D. Minority Interests E. Solo Consolidation F. Consolidated Capital G. Consolidated Capital Resources Requirements Operational risk Advanced IRB approaches Large exposures Chapter 25. Financial Conglomerates A. Issues with Conglomerates Double or multiple gearing Debt downstreamed as equity Unregulated intermediate holding companies Unregulated entities engaged in financial business Participations and minority interests in regulated entities B. Banks in Non-Financial Groups C. Mixed Activity Groups D. Methods of Regulating Financial Conglomerates Method 1 Method 2 Method 3 Method 4 E. Consolidating Unconnected Entities F. Groups Headquartered Outside the EU Chapter 26. Cross-Border Supervision of Bank Groups A. International Group Supervision B. EU Group Supervision Chapter 27. Pillar Three—Disclosure Requirements A. Introduction B. Scope of the Pillar Three Regime C. Basic Requirements Basel requirements EU requirements D. Capital Structure Basel requirements EU requirements E. Capital Adequacy Basel requirements EU requirements F. Credit Risk: General Disclosures for All Banks Basel requirements EU requirements G. Credit Risk: Disclosure for Portfolio Subject to the Standardized Approach and Supervisory Risk Weights in the IRB Approaches Basel requirements EU requirements H. Credit Risk: Disclosures for Portfolio Subject to IRB Approaches Basel requirements EU requirements I. Credit Risk Mitigation: Disclosures for Standardized and IRB Approaches Basel requirements EU requirements J. General Disclosure for Exposures Related to Counterparty Credit Risk Basel requirements EU requirements K. Securitization: Disclosure for Standardized and IRB Approaches Basel requirements EU requirements L. Market Risk: Disclosures for Banks using the Standardized Approach Basel requirements EU requirements M. Market Risk: Disclosures for Banks using the Internal Models Approach (IMA) for Trading Portfolios Basel requirements EU requirements N. Operational Risk Basel requirements EU requirements O. Equities: Disclosures for Banking Book Positions Basel requirements EU requirements P. Interest Rate Risk in the Banking Book Basel requirements EU requirements Q. Remuneration Qualitative disclosures Quantitative disclosures

Index Footnotes Chapter 1

Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 23 Chapter 24 Chapter 25 Chapter 26 Chapter 27

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