From Basel 1 to Basel 3: The Integration of State of the Art Risk Modelling in Banking Regulation »

Laurent Balthazar is a Bank Credit Analyst at Dexia Bank.

The book covers topics related to banking regulation and credit risk modelling. The proposed rules are presented and key issues regarding implementation of the accord identified. The model used to calibrate the capital requirements under Basel 2 is analyzed and projected forward to present what could be key new elements in the future Basel 3 regulation. A CD-ROM is included to illustrate regulator models.

List of Figures, Tables, and Boxes     ix
Acknowledgments     xiv
List of Abbreviations     xv
Website     xix
Introduction     1
Current Banking Regulation
Basel 1     5
Banking regulations and bank failures: a historical survey     5
The Basel 1988 Capital Accord     16
The Regulation of Market Risk: The 1996 Amendment     23
Introduction     23
The historical context     24
Amendment to the Capital Accord to incorporate market risk     27
Critics of Basel 1     32
Positive impacts     32
Regulatory weaknesses and capital arbitrage     33
Description of Basel 2
Overview of the New Accord     39
Introduction     39
Goals of the Accord     39
Open issues     40
Scope of application     41
Treatment of participations     42
Structure of the Accord     44
The timetable     47
Summary     47
Pillar 1: The Solvency Ratio     49
Introduction     49
Credit risk - unstructured exposures - standardized approach     50
Credit risk - unstructuredexposures - IRB approaches     58
Credit risk: securitization     63
Operational risk     73
Pillar 1 treatment of double default and trading activities     76
Pillar 2: The Supervisory Review Process     89
Introduction     89
Pillar 2: the supervisory review process in action     90
Industry misgivings     93
Pillar 3: Market Discipline     95
Introduction     95
Pillar 3 disclosures     95
Links with accounting disclosures     96
Conclusions     99
The Potential Impact of Basel 2     101
Introduction     101
Results of QIS 3     101
Comments     104
Conclusions     105
Implementing Basel 2
Basel 2 and Information Technology Systems     109
Introduction     109
Systems architecture     109
Conclusions     112
Scoring Systems: Theoretical Aspects     114
Introduction     114
The Basel 2 requirements     115
Current practices in the banking sector     117
Overview of historical research     119
The data     123
How many models to construct?     126
Modelization steps     127
Principles for ratio selection     130
The logistic regression     133
Performance measures     136
Point-in-time versus through-the-cycle ratings     142
Conclusions     144
Scoring Systems: Case Study     145
Introduction     145
The data     145
Candidate explanatory variables     148
Sample selection     154
Univariate analysis     155
Model construction     171
Model validation     175
Model calibration     178
Qualitative assessment     179
Conclusions     181
Hypothesis Test for PD estimates     182
Comments on low-default portfolios     187
Loss Given Default     188
Introduction     188
LGD measures     188
Definition of workout LGD     189
Practical computation of workout LGD     190
Public studies     194
Stressed LGD     198
Conclusions     199
Implementation of the Accord     200
Introduction     200
Internal ratings systems     201
The quantification process     201
The data management system     202
Oversight and control mechanisms     203
Conclusions     204
Pillar 2: An Open Road to Basel 3
From Basel 1 to Basel 3     209
Introduction     209
History     209
Pillar 2     211
Basel 3     211
Conclusions     212
The Basel 2 Model     214
Introduction     214
A portfolio approach     214
The Merton model     217
The Basel 2 formula     219
Conclusions     235
Extending the Model     237
Introduction     237
The effect of concentration     237
Extending the Basel 2 framework     238
Conclusions     247
Integrating Other Kinds of Risk     248
Introduction     248
Identifying material risks     248
Quantification and aggregation     276
Typical capital composition     279
Conclusions     280
Conclusions     283
Overview of the book     283
The future      284
Bibliography     286
Index     291