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Basel II

BIS - bank for international setllments


CRAR: Capital to Risk Weighted Asset Ratio
BAsel I - 1988 - 8% of RWA assets (based on only credit risk)
resulted in formation of BASEL II
reuired banks to make uf of Internal Ratings-Based approach
to calculate their capital requiremnt for credit risk.
Calculation based on ratings internally developed by banks.
Unsystematic risk by earning/provision
systematic risk by capital
IRB approach:
Piller I - COM riks
other Approaches: Standareds approache - SA - Credit
Basic Indicator approache - BIA - operational
depends upon:
Cost of Implementation: COI
Cost of Compliance : COC
Commerial bank starte basel II from march 31 2007
3 pillers of Basel II:
-Min cap
-Sup
- Discipline
Piller I - min cap requirem for credit rsisk
can be cal in 3 ways
- Standareds approach:
BCBS (basel committee on banking supervision)
ECA - export credit agnecy
CRAR = Total Eligibli cap / RWA for (C + O + M)
- Foundation internal rating based approache
method
- PD based on historial data of 5 yrs
- LGD ( loss given the default)
- EAD ( exposure of default)
- Matureity of exposure/ remainng economic maturit of exp
- risk weight provided by basel II formulat
The risk weighte assedt = total cap reqiurem/ 0.09
- Advanced internal rating based approach
data of 7 years to calculate PD, LGD, EAD, M
* 5 stages for determing credit risk
- determin cat of expoure out of 5 by rbi
- determin/backing of depostio underline
-refining the applicable risk weights
- RWA of exposure = Adjusted exposure of Party Net of Allowa
ble Reduction * Risk weight

= Consolidate total RWA = total RWA fo all exposures


Piller -I determing total exposure
total exposor of abank for a borrowre is sum totoa 3 expo
- o/s balan in fund based facilit
- saction but unavialbed limits in fund based
- exposure arising out of non-fund based
Calsulation of credit expor allows for dduc
- deposit under line
- keeping approved collatersal
expore on a/c of unavial portion of sanctio fund
equal to (20% of un-drawn portion of fundbased excp TL)
+ (20% of undrw of port of TL to be dra in 1 year)
+ (50% of undr port of TL to be drawn after 1 year)
un-drwan which is yeat to be disbursed
NOn-fund based exposue
- financial gurantees
- Accptances
- Performance gurantees
- letter of Credit
- Uncondition take out finance
- Condition take out finance
Computing credit equivalent of non-fund based exposure
outstanding non-fun based facilit multiplie by corresponding
Credit Conversion Factors (CCFs) by RBI
* Allowble reduct = C * [1 - Hfx] * Mf
c - current value of bank deposit
HFx - 0 if the exp and the coll insame cure
HFx = 0.08 if in another currec
Mf - maturity factor given by RBI to adjust for mismatch in
the maturity
- approved financi collater
allowable reduction = [C X (1 - Hc - Hfx) X Mf] - E x He
E - expsoure of net of margin and allowab reduc on ac of lien depos
C - current value of eligible financial collateral
He - haircult appropriate to exposure given by rbi based
upon couter part rating and maturity of transact between
0.5% and 25%
Hc - haricul approra to collateral.
value - 0(for govt) and 25%
* 3 diff approach to calc opeartional risk
- Basic Indicator approacH
15% ( )
then dividy by 0.09
* Minimum Capital requirement for Mkt risk
Value at Risk (VaR)

approache for mkt risk


- standardies approach (matruity method)
The general market risk (GMR) of band =
The position entered in the band * risk wt of band
* assumed change in yield of bank
sum of gmr of all band will be gmr of portfolio
Total capital for mkt risk = Total Gmr of the Portfolio
+ total specifid risk
* duration method
- cap charge for "specifi risk" given by rbi
cap chargefor GMR = modified duration of security * assume
change in yiled (by rbi) * Value of security in portfoli
Capital charge for mkt risk for secuirty
= cap charg for specifi risk security + cap charg for
GMR for security
total cap charge for mkt risk portfoli =
the sum of the capital charge for mkt risk of all secir
TRA for mkt risik =
Total Capital chage / 0.09
* Internal model mothod
- conssolid cRAR
- Total Elibli capital / RWA (C o m)
Totoal capital must be atleas 9% of the sum of RWa
tire compo of asset atleast 6% of RWA
* principles of Supervisory review