Basel - Measuring and Managing Credit Risk under the Enhanced Framework
Duration: 2 days
- General Introduction to Credit Risk and Basel
- Recent Enhancements to the Basel Framework
- Measuring Credit Risk under Basel
- Standardized Approach to Measuring Credit Risk
- Foundation and Advanced Approaches
- Internal Rating Models
- Treatment of Collateral and Credit Derivatives
- Practical Implementation Issues
The objective of this seminar is to give you an in-depth understanding of and “hands-on” experience
with the Basel principles for measuring credit risk.
We will start with a brief, overall introduction to credit risk and to the Basel framework and its
“Three-Pillar Approach”. We will give an account of the historical development of Basel I, II,
2.5 and III, and will discuss possible consequences of Basel II for banks and corporations, as
well as for the global financial system. We will also give a thorough review of enhancements to the
Basel II framework following the “financial meltdown” of 2007/2008.
We explain in detail the different approaches to measuring credit risk. First, 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.
We then 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, using the
“Point-in-Time” as well as the “Trough-the-Cycle” approaches. We also explain the principles for
internal and external validation of internal rating systems.
We will then look at the treatment of risk mitigation techniques such as collateral and credit
derivatives, and we give a thorough explanation of the enhanced rules for treatment of
securitisations, resecuritisations, liquidity facilities, self-guarantees etc. under the
standardised and the IRB approaches.
Finally, we will discuss some practical aspects of the implementation of Basel II, including
systems and data requirements and the regulatory review process. In particular, we will discuss
possible further supervisory improvements to the Basel II framework and their consequences for
future regulatory capital levels.
We will also discuss how Basel II can be integrated into an overall ERM framework and how you can
actually make money from Basel III “compliance”.
Day One
09.00 - 09.15 Welcome and Introduction
09.15 - 12.00 General Introduction to Basel II
- Background, Intentions and Scope
- The Three Pillars of Basel
- The Risk Measurement Framework
-
Basel II and the Global Credit Crisis
- Why did Basel II not prevent the crisis?
- The Enhanced Basel III Framework
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
- Treatment of Securitization and Liquidity Facilities under the Enhanced
Framework
- 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
- "Point-in-Time" vs. "Through-the-Cycle" Estimates
- 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
- Treatment of Securitization and Liquidity Facilities under the Enhanced Framework
- Recognition of Provisions under IRB
- Validation of Internal Rating Systems
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”)
- Strengthening of the SREP to secure a more sound credit culture
-
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? Too procyclical?
- Scenarios for possible further regulatory reform
Evaluation and Termination of the Seminar
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