CREDIT AND MARKET RISK

Credit and Market Risk

Credit and Market Risk

Introduction

The financial crisis of 2008-09 has prompted a wave of banking reform. Massive new regulatory packages have been agreed upon in Europe and the United States, and regulators and bankers are now rolling up their sleeves to prepare for the next phase of compliance and implementation. Banking leaders are keen to understand the complexities of proposed reforms and their impact on independent businesses. They are especially interested to know the effects on those businesses that are the subject of the stiffest reforms.

We assess the full impact of regulation, including new capital, liquidity, and funding requirements; product-specific restrictions; and structural changes to markets, for example, in securitizations, over-the-counter (OTC) derivatives, and proprietary trading. Several of the new rules will be phased in over time through 2019, but for the sake of simplicity, we have calculated their impact as if they went into immediate effect (Goodhart and Schoenmaker, 2009). Reform known as "Basel III", which is the response of the Basel Committee to the financial crisis, main purpose is to:

Enhance the level and quality of capital ("tier one and core tier one")

Establish a leverage ratio ("leverage ratio")

Improve management of liquidity risk through the creation of two liquidity ratios (current ratio of one month "Liquidity coverage ratio" and the liquidity ratio to one year "Net stable funding ratio)

Strengthen prudential requirements for counterparty risk.

It complements a first set of amendments to the Basel II took place in July 2009 relating to market risk for:

Strengthen the monitoring of market activities (introduction of an additional risk IRC and align the treatment of securitization positions in the banking book). This section shall come into force on December 31, 2011.

At the micro-prudential reforms to strengthen, the resilience of the participating institutions of credit, plus proposals for nature macro-prudential being developed, to reduce pro cyclicality (e.g. countercyclical capital buffer) and the systemic risk (Brunnermeier, 2009). The Basel III includes a set of measures to strengthen the resilience of major international banks as well as specific measures of liquidity risk. Both texts were published December 16, 2010. A revised version of the Basel III completed the counterparty risk was published on 1 June 2011. Its implementation will be gradual:

The first steps will be effective January 1, 2013

All measures should be implemented on 1 January 2019.

In order to facilitate a harmonized implementation of the new system, a system of questions / answers is available on the website of the Basel Committee on issues of capital and liquidity.Discussion

The Basel III reform of bank regulation proposes a strengthening of capital and stress tests in situations of economic stress, tougher capital requirements for market activities and supervision of the management of liquidity risk. In the final text, published last December, the Basel Committee wanted to silence some critics by incorporating certain amendments requested by the profession. But if the banks satisfied with the progress achieved some subjects are still debated (Gorton, 2009).

The concept of Basel III refers to a package of reforms of the Basel Committee of the Bank for International Settlements (BIS) for the existing banking regulation Basel II. There the reaction is the world of the ...