Economic capital structure and banking financial risks aggregation
Banks must maintain a balance between their own capital and the level of accepted aggregate risk to ensure financial stability. This paradigm is expressed in terms of capital adequacy requirements to both the minimum capital required to cover regulatory risks and the risk capital required to fully c...
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| Veröffentlicht in: | Risk assessment and financial regulation in emerging markets' banking |
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| 1. Verfasser: | |
| Format: | UnknownFormat |
| Sprache: | eng |
| Veröffentlicht: |
2021
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Tag hinzufügen | Zusammenfassung: | Banks must maintain a balance between their own capital and the level of accepted aggregate risk to ensure financial stability. This paradigm is expressed in terms of capital adequacy requirements to both the minimum capital required to cover regulatory risks and the risk capital required to fully cover bank's total risk (economic capital). Therefore, the Basel Committee on Banking Supervision requires banks to implement ICAAP procedures to ensure regular risk assessment and maintain a sufficient level of capital. The Basel Committee on Banking Supervision regularly analyzes the implementation of ICAAP by global systemically important banks (G-SIB). Following the results of the analysis, the Committee has identified a number of relevant development areas: selection of approach to aggregate different material risks, detection and allocation of risk capital taking into consideration the effect of diversification, and setting limits as a function of capital allocation by activities and types of risks. This section offers a solution to the problem. It presents a conceptual approach to determining economic capital structure, which is based on material risk identification and on the determination among them of financial risks, assessed using quantitative methods. We propose a simulation model of the bank’s economic capital where the total risk is presented as a composition of the products of the material risk's factors on the P&L elements exposed to these risks. Thus, the elements of the P&L define the weights for the material risk's distributions in the economic capital model. The economic capital model makes it possible to assess the distribution of the bank’s total risk at different management levels (products - departments - total bank), disaggregate the available capital by products, business lines, and types of risks and, on this basis, establish limits based on the distribution of capital in accordance with the Pillar-2 requirements of Basel II. |
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| ISBN: | 9783030697471 |