We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byAubrie Speake
Modified over 2 years ago
© K.Cuthbertson and D.Nitzsche LECTURE REGULATION OF FINANCIAL INSTITUTIONS 1/9/2001 FINANCIAL ENGINEERING: DERIVATIVES AND RISK MANAGEMENT (J. Wiley, 2001) K. Cuthbertson and D. Nitzsche
© K.Cuthbertson and D.Nitzsche REASONS FOR REGULATION TYPES OF RISK REGULATORY FRAMEWORK WHAT IS CAPITAL ? TYPES OF RISK BASLE (1988) ACCORD - CREDIT RISK TOPICS
© K.Cuthbertson and D.Nitzsche 1. MARKET FAILURE a)externalities eg. bank run, credit crunch = systemic risk b)market power eg. fixed commissions monopoly/cartels (eg Japanese Banks) REASONS FOR REGULATION
© K.Cuthbertson and D.Nitzsche 2. OTHER REASONS protection of payments system(BoE) protection from fraud (FSA) promotion of competition (FSA) protection of small depositors (FSA) education (FSA) REASONS FOR REGULATION
© K.Cuthbertson and D.Nitzsche 3. INFORMATION PROBLEMS asymmetric information leads to deposit insurance Fixed rate deposit insurance leads to problems of adverse selection (eg. motor insurance, too many risky drivers) moral hazard (eg. drives recklessly because hes insured) Regulator has principal-agent problem (cant fully monitor behaviour, eg. drinking and driving, after providing insurance). REASONS FOR REGULATION
© K.Cuthbertson and D.Nitzsche WHAT IS CAPITAL ? Capital(Equity) = Shareholders funds + past retained profits Capital acts as like a deductible or excess on an insurance policy It is a financial cushion for the bank Banks equity represents the amount the banks assets may fall, such that the depositors could in principle still sell off the remaining good assets and obtain the full face value of their deposits
© K.Cuthbertson and D.Nitzsche STYLISED BALANCE SHEET(S) HIGHLY (LOW) CAPITALISED BANK
© K.Cuthbertson and D.Nitzsche What Drives Financial Markets ? Rational Behaviour or : PIGS
© K.Cuthbertson and D.Nitzsche TYPES OF RISK Legal Risk :the risk that a contract is not enforced as expected Liquidity Risk :lack of a counterparty to trade with in the time scale desired Credit Risk :lack of funds available by the counterparty who then defaults Operational Risk : origination, settlement and clearing of trades is mishandled (eg. faulty IT, fraud).
© K.Cuthbertson and D.Nitzsche Assimilation Risk :participants do not fully understand how assets are priced Incentive Risk :remuneration packages which encourage excessive risk taking. Market Risk :risk due to a fall in asset prices which involves ~ Model and estimation risk = Choosing the wrong model or the wrong estimation technique to estimate the risk model (eg. assume niid returns) TYPES OF RISK
© K.Cuthbertson and D.Nitzsche Buy Close out\Sell Five eights make $1.4bn ? Leesons Futures Trades on Nikkei225
© K.Cuthbertson and D.Nitzsche FINANCIAL SCANDALS South Sea Bubble, Tulipmania Pensions Mis-selling (£1bn+) \ Maxwell(£400m) Barlow Clowes (Gov.Bonds) BCCI-1991 ( Drug Money / Laundering) Proctor and Gamble (Int Rate Derivatives) Orange County (Int Rate Derivatives, $7bn) Metallgeschellschaft (oil derivatives >$1bn) Barings ( Leeson -Derivatives, $1.4bn) Sumitomo ( Copper $1bn ) Morgan Grenfell ( Asset Management, £240m) Nat West/UBS ( Derivatives £100m) LTCM ($4.4bn- Sept 98)
© K.Cuthbertson and D.Nitzsche OPEN PRISON ?
© K.Cuthbertson and D.Nitzsche Basle (1988) Accord on Credit Risk
© K.Cuthbertson and D.Nitzsche TOPICS BASLE (1988) ACCORD Risk Weights Equity-Assets Ratio/ Risk Adjusted Asset Ratio Bank Capital: Tier I and II
© K.Cuthbertson and D.Nitzsche Basle (1988) Risk Weights Risk Weights (0 ot 100%) given to all types of counterparty (e.g. OECD governments, corporates etc) and asset (e.g. bank loans, securities held) Equity capital required for credit risk is set at a min. = 8% of value of (risk weighted) total assets
© K.Cuthbertson and D.Nitzsche RELATIVE RISK WEIGHTS Zero % 20% 50% 100% cash and gold bullion claims on OECD central banks claims on development banks claims on other OECD banks mortgages on residential property claims on private sector (eg. bank loans) claims on governments outside OECD
© K.Cuthbertson and D.Nitzsche RISK-ADJUSTED ASSETS RATIO, RAR Risk Weights of w i= 10, 20 or 50 and 100% A i = market value of banks assets Risk Weighted Total Assets  RWTA = (w i /100) A i Risk Adjusted Assets Ratio, RAR  RAR = (Equity Capital /RWTA) x 100 Basle Accord requires RAR to be greater than 8% The more Equity capital E, you hold (as proportion of total assets), the bigger cushion against potential losses
© K.Cuthbertson and D.Nitzsche SOLVENCY AND THE BASLE RATIO Solvency requires: Tot Assets(TA)- Bad Debts(BD) >Deposits (D) TA - BD > D But balance sheet gives TA=D +E Hence solvency requires: E > BD or (E/TA) > (BD/TA) (BD/TA)= proportion of Bad Debts (g) (E/TA) = Equity assets ratio
© K.Cuthbertson and D.Nitzsche SOLVENCY AND THE BASLE RATIO Solvency requires: The equity-assets ratio, EAR (= E/TA), exceeds the proportion of bad debts, g. Risk Adjusted Assets Ratio RAR Replace equity-assets ratio with RAR Solvency requires: RAR > g (latter set at 8% by Basle) g = proportion of bad debts
© K.Cuthbertson and D.Nitzsche BASLE/EC : BANK CAPITAL Tier I Capital a) share capital/common stock b) cumulative retained earnings c) non-cumulative perpetual preference shares Tier 2 Capital a) cumulative perpetual preference shares b) undisclosed reserves b) revaluation reserves +hybrid debt/equity + subordinated term debt Note: deductions for investments in other banks and goodwill
© K.Cuthbertson and D.Nitzsche Basle 2000 Suggestions
© K.Cuthbertson and D.Nitzsche OFF-BALANCE-SHEET ACTIVITIES 1. INCOME FROM FEES a) commissions on FX transactions b) servicing mortgage-backed security c) guaranteeing debt securities d) backup lines of credit 2. NET POSITION IN FORWARD FOREIGN EXCHANGE
© K.Cuthbertson and D.Nitzsche ENDS LECTURE
Chapter Fifteen The Management of Capital Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Chapter 10 Banking and the Management of Financial Institutions.
Capital Requirements for Banks Tier 1 capital is related to common stocks, non- cumulative perpetual preferred stocks, and disclosed reserves Tier 2 capital.
1 Ch 9: General Principles of Bank Management How the bank manages its assets and liabilities to earn the highest possible profits? The manager of.
Chapter Five The Financial Statements of Commercial Banks Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
BASEL I and BASEL II: HISTORY OF AN EVOLUTION Hasan Ersel HSE May 23, 2011.
CHAPTER FOURTEEN The Management Of Capital The purpose of this chapter is to discover why capital – particularly equity capital – is so important for.
CHAPTER Three The Management Of Capital. Tasks Performed By Capital Provides a Cushion Against Risk of Failure Provides Funds to Help Institutions Get.
CHAPTERS 19, Bank Profits = Loans x Realized Loan Yield - Deposits x Cost per $ of Deposits - Fixed Expenses RLY = Contractual rate x Good.
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Five The Financial Statements of Banks and Their Principal Competitors.
Copyright © 2012 Pearson Prentice Hall. All rights reserved. CHAPTER 17 Banking and the Management of Financial Institutions.
Chapter Two Banking Background. Who is in charge of the banks? Germany: Federal Supervisory Authority (BaFin) France: Banking Commission Switzerland:
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Fifteen The Management of Capital.
Banking and the Management of Financial Institutions © 2005 Pearson Education Canada Inc.
An Overview of the Financial System chapter 2. Function of Financial Markets Lenders-Savers (+) Households Firms Government Foreigners Financial Markets.
Chapter 9. The Bank Firm & Bank Management Balance sheet Bank Management Credit Risk Interest Risk Other activities & financial innovation Balance sheet.
ALOMAR_212_31 Chapter 2 The Financial System. ALOMAR_212_32 Intermediaries, instruments, and regulations. Financial markets: bond and stock markets Financial.
Irwin/McGraw-Hill 1 Capital Adequacy Chapter 20 Financial Institutions Management, 3/e By Anthony Saunders.
An Overview of the Financial System chapter 2 1. Function of Financial Markets Lenders-Savers (+) Households Firms Government Foreigners Financial Markets.
1 17 Commercial Bank Operations. 2 Chapter Objectives Describe the most common sources of funds for commercial banks Describe the most common uses of.
1 CHAPTER IX INTERNATIONAL FINANCIAL MARKETS The International Financial System INTERNATIONAL BUSINESS.
Risk Management in Financial Institutions 1 Managing Credit Risks Managing Interest Rate Risks Income Gap Analysis Duration Gap Analysis Hedging with Financial.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
1 Lecture 17: General bank management Mishkin Ch 9 – part A page
…A healthy and vibrant economy requires a financial system that moves funds from people who save to people who have productive investment opportunities…
Chapter 9 The Banking Firm and the Management of Financial Institutions.
Introduction to the Financial System. In this section, you will learn: about securities, such as stocks and bonds the economic functions of financial.
BANKING. Banking is a combination of businesses designed to deliver the services Pool the savings of and making loans Diversification Access to.
Chapter Fifteen The Banking Firm and Bank Management.
How Banks Work CHAPTER TWO. The Role of Banks A bank is a financial intermediary that accepts deposits from savers and makes loans to borrowers. By making.
Money and Banking Lecture 24. Review of The Previous Lecture Banking Types of Banking Institutions Commercial Banks Savings Institutions Credit Unions.
MACROECONOMICS MACROECONOMICS and the FINANCIAL SYSTEM © 2011 Worth Publishers, all rights reservedPowerPoint® slides by Ron Cronovich N. Gregory Mankiw.
1 CHAPTER 25 Insurance and Pension Fund Operations.
Chapter 15 Money supply Process. Four players in the Money Supply Process Functions of the central Bank The central Bank Balance sheet Monetary Policy.
Banks Chapter 2 Risk Management and Financial Institutions 2e, Chapter 2, Copyright © John C. Hull
Banking, Investing and Insurance BUSINESS AND BANKING AND PROFITABILITY.
Chapter 9: Bank Management Chapter Objectives Explain what a balance sheet and a T-account are. Explain what banks do in five words and also at length.
1 Chapter 1 Role of Financial Markets and Institutions.
ALOMAR_212_4 1 Financial Market Instruments. ALOMAR_212_42 What are the securities (instruments) traded in the financial market? 1- Money Market Instruments:
Presented by 9164 – Jenovah Carl Fernandes 9117 – Ashwini Jadhav 9108 – Amit Bhamare 1.
Financial Markets. Types of Assets Tangible Assets Value is based on physical properties Examples include buildings, land, machinery Intangible Assets.
Chapter 9 Banking and the Management of Financial Institutions.
10-1 Financial Innovation and Banking Industry Structure Responses to Changes in Risk 1.Adjustable-rate mortgages 2.Financial Derivatives Responses to.
Chapter 2: An Overview of the Financial System Classifying Financial Markets Financial Market Instruments Financial Intermediaries Regulation Classifying.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.1 CHAPTER 3 Depository Institutions.
© K.Cuthbertson, D.Nitzsche FINANCIAL ENGINEERING: DERIVATIVES AND RISK MANAGEMENT (J. Wiley, 2001) K. Cuthbertson and D. Nitzsche Lecture Regulation in.
McGraw-Hill/Irwin 20-1 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Importance of Capital Adequacy Absorb unanticipated losses and preserve.
Regulation, Basel II, and Solvency II Chapter 11 Risk Management and Financial Institutions 2e, Chapter 11, Copyright © John C. Hull
© 2017 SlidePlayer.com Inc. All rights reserved.