Pillar II in the New Basel Accord

Book description

Pillar II complements the 'black letter’ requirements of Pillar I and is intended to achieve two objectives: to ensure that banks have adequate capital to support all the risks in their business and to encourage them to use better techniques for monitoring and managing their risks.

The second pillar specifically emphasises the need for a qualitative approach to supervising banks. It constitutes an integral part of the new capital accord and ranks equally alongside the minimum capital requirements and the call for market transparency.

Pillar II in the New Basel Accord: The Challenge of Economic Capital takes you through every main strand of Pillar II. It tackles the regulatory framework, shows how to reconcile the various regulatory sources and focuses on the following sequence of questions:

• What additional capital is required to support Pillar I risks where the Basel II models do not adequately reflect the unique circumstances of the particular bank?
• What additional capital is required to support risks not captured under Pillar I at all?
• What reduction in capital should be allowed to account for the fact that individual risks may be less than perfectly correlated?
• What further adjustment should be made to counteract procyclical movements in regulatory capital resulting from the Pillar I calculation?
• How should a banking group’s economic capital be allocated to its business units and legal entities?
• How will supervisors from different countries interact when assessing Pillar II implementation in international banks?
• How will hybrid capital help in preserving and maintaining the capital adequacy levels dictated by Pillar II?

Pillar II in the New Basel Accord is an indispensable book for any financial practitioner affected by the Basel II accord, including chief financial officers, chief operating officers, chief investment officers, risk managers, credit risk managers, senior compliance officers, and also those working in the fields of operational risk, compliance, regulation, credit, and risk management.

Book details

ISBN

9781906348373

Publish date

1 Dec 2008

Format

Size

155mm x 235mm

Editor biography

Andrea Resti with a Preface By Michael Gordy

Andrea Resti is a professor of financial markets and institutions at Bocconi University, Milan, where he holds courses on “credit risk measurement and management”, “risk and value management in banks”, “private banking and institutional money management”, as well as in several short courses for bank executives. He heads Bocconi’s Carefin, Centre for Applied Research in Finance, a think tank producing books, conferences and research papers.

Andrea has been active in the financial sector for about 20 years. After working for seven years in the research and planning department of a major Italian bank, Andrea moved to academia, first at Bergamo University and then at Bocconi, the leading Italian university in business and economics. In the last few years he has been in charge of risk management education projects for the Italian Bankers’ Association and the Bank of Italy, including a number of courses on Pillar II and Economic Capital. Formerly, he has served as managing director of FinMonitor, a research institute on bank M&As in Europe, as well as “senior rapporteur” for the Basel II Task Force promoted by the Centre for European Policy Studies in Brussels and “economic advisor” to Assogestioni, the association of Italian fund managers.

Andrea acts as a consultant to major banking institutions and as an independent expert for the Italian magistrates on crimes arising from complex financial transactions. His main research areas are credit risk management and regulation, with a special focus on the Basel Accord, risk measurement for managed portfolios and quantitative measures of bank efficiency (including post-merger efficiency increases).

Table of contents

About the Editor

About the Authors

Preface

Michael Gordy

Federal Reserve Board

Introduction

Andrea Resti

Bocconi University

Foreword

Frank De Jonghe

Deloitte

PART I: THE REGULATORY FRAMEWORK

1 Pillar II in the New Basel Accord and in the New European Directives

Martina Bignami and Andrea Pilati

Bank of Italy

2 The Capital Adequacy Assessment Process: A Supervisory Perspective

Preston Thompson; David Palmer

Federal Reserve Bank of Boston; Federal Reserve Board, Washington

3 The International Coordination of the Supervisory Activity under Pillar II

Andrea Enria, Cécile Meys and Oleg Shmeljov, Committee of European Banking Supervisors

PART II: THE MAIN RISK TYPES TO BE ASSESSED UNDER PILLAR II

4 Concentration Risk in the Credit Portfolio

Andrea Resti

Bocconi University

5 Specification and Calibration Errors in Measures of Portfolio Credit Risk

Nikola Tarashev, Haibin Zhu, Bank for International Settlements

6 Empirical Assessment of Asset Correlations

Ahmet E. Kocagil, Jing Liu

Fitch Solutions

7 Modelling and Measuring Business Risk

Klaus Böcker

UniCredit Group

8 An Introduction to Liquidity Risk

Mario Anolli; Andrea Resti

Università Cattolica del S. Cuore; Bocconi University

9 Portfolio Theory in Illiquid Markets

Carlo Acerbi

Abaxbank

10 Interest Rate Risk on the Banking Book

Andrea Resti and Andrea Sironi

Bocconi University

PART III: RISK INTEGRATION AND CAPITAL MANAGEMENT

11 Principles of Risk Aggregation

Francesco Saita

Bocconi University

12 Aggregation by Risk Type and Inter Risk Correlation

Klaus Böcker

UniCredit Group

13 Risk Aggregation in a Large International Financial Group: A Case Study

Ruben Olieslagers, Patrick Acx

Fortis

14 Compounding Effects between Market and Credit Risk: The Case of Variable-Rate Loans

Thomas Breuer, Martin Jandačka, Klaus Rheinberger; Martin Summer

PPE Research Centre; Austrian Central Bank

15 Credit Portfolio Stress-Testing and Scenario Analysis

Brian Dvorak

Moody’s KMV

16 Towards Comparable Basel II Ratios: Standard & Poor’s Risk-Adjusted Capital Framework

Bernard de Longevialle, Elie Hériard-Dubreuil, and Thierry Grunspan

Standard & Poor’s

17 Capital Allocation to Business Units and Sub-Portfolios: the Euler Principle

Dirk Tasche

Lloyd’s TSB

18 Capital Management through Hybrid Capital

Laetitia Mouquot

Committee of European Banking Supervisors

Index

Testimonials

"Rarely does a book make a more timely appearance. As Pillar II in the New Basel Accord goes to print, bankers and regulators are grappling with the most severe and widespread financial crisis since the Great Depression.

This volume fills a large and glaring gap on the Basel II bookshelf, and should be required reading for both bankers and supervisors involved in the implementation of Basel II"

Michael Gordy