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    BASEL IV Guide
    BASEL IV Guide
    BASEL IV Guide
    Ebook110 pages36 minutes

    BASEL IV Guide

    By Anand Vemula

    ()

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    About this ebook

    The book begins by elucidating the origins and evolution of the Basel Accords, tracing their development from the original Basel I framework to the more recent Basel III reforms and the subsequent introduction of Basel IV. Readers gain a deep understanding of the motivations behind each iteration of the Basel Accords and the key objectives driving regulatory reforms in the banking sector.

     

    Central to the book's narrative is a detailed exploration of the Basel IV framework itself. Readers are guided through the various components of Basel IV, including standardized approaches for credit risk, operational risk, and market risk, as well as the implementation of the standardized output floor and the revised framework for measuring the exposure of banks to counterparty credit risk.

     

    Moreover, the book delves into the implications of Basel IV for banks and financial institutions, exploring how the new regulatory requirements may impact capital adequacy, risk management practices, and business strategies. Through insightful analysis and practical examples, readers gain clarity on the challenges and opportunities presented by Basel IV compliance.

     

    In addition to dissecting the technical aspects of Basel IV, the book also addresses broader themes such as regulatory compliance culture, stakeholder communication, and the evolving role of regulators in ensuring financial stability. By providing a holistic perspective on Basel IV, the book equips readers with the knowledge and tools needed to navigate the changing regulatory landscape with confidence and proficiency.

    LanguageEnglish
    PublisherAnand Vemula
    Release dateAug 25, 2024
    ISBN9798227280206
    BASEL IV Guide

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      Book preview

      BASEL IV Guide - Anand Vemula

      Chapters

      •  Module 1: Revision of the Standardised Approach for Credit Risk

      •  Module 2: Future of the IRB Approach

      •  Module 3: New Standardised Approach to Measure Counterparty Credit Risk (SA-CCR)

      •  Module 4: New Basel Securitisation Framework and Basel IV for Funds

      •  Module 5: New Framework for Market Risks

      Chapters

      •  Module 6: CVA Risk Capital Charge Framework

      •  Module 7: New Basel Framework for Large Exposures

      •  Module 8: TLAC and MREL

      Module 1: Revision of the Standardised Approach for Credit Risk

      The standardised approach capital need is the simple sum of three components: the sensitivities-based method capital requirement, the default risk capital (DRC) requirement, and the residual risk add-on (RRAO).

      With the sensitivities-based method, the capital requirement must be estimated by aggregating three risk measures: delta, vega, and curvature:

      Delta: a risk measure based on an instrument's sensitivity to regulatory delta risk variables.

      Vega: is a risk measure on the basis of regulatory vega risk factors.

      Curvature: is a risk measure that reflects the incremental risk that the delta risk measure does not capture for price changes in an option. Curvature risk is calculated using two stress scenarios that include an upward and a downward shock to each regulatory risk element.

      (Continued)

      The three risk measurements define the risk weights that will be applied to the regulatory risk factor sensitivities.

      The risk-weighted sensitivities are pooled using defined correlation parameters to recognise diversification benefits between risk variables in order to compute the total capital requirement.

      To handle the risk that correlations will grow or decrease during times of financial stress, a bank must construct three sensitivities-based method capital requirement estimates based on three alternative scenarios based on the stated correlation parameters.

      (Continued)

      The DRC requirement captures the jump-to-default risk for credit-risk instruments.

      It is calibrated on the basis of the credit risk treatment in the banking book to minimise potential disparities in capital requirements throughout the bank for similar risk exposures.

      For similar types of exposures, some hedging recognition is permitted. Furthermore, the Committee recognises that the standardised method cannot capture all market risks, as this would entail an overly complicated framework.

      An RRAO is thus developed to ensure adequate market risk coverage for the selected instruments. The procedure for calculating the RRAO.

      General Aspects

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