The Basel Handbook
First published:
ISBN: 9781904339557
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Stress Tests of Banks’ Regulatory Capital Adequacy: Application to Tier 1 Capital and to Pillar 2 Stress Tests
Esa Jokivuolle and Samu Peura
Development and Validation of Key Estimates for Capital Models
Explaining the Correlation in Basel II: Derivation and Evaluation
Explaining the Credit Risk Elements in Basel II
Loss Given Default and Recovery Risk: From Basel II Standards to Effective Risk Management Tools
Assessing the Validity of Basel II Models in Measuring Risk of Credit Portfolios
Measuring Counterparty Credit Risk for Trading Products under Basel II
Implementation of an IRB-Compliant Rating System
Stress Tests of Banks’ Regulatory Capital Adequacy: Application to Tier 1 Capital and to Pillar 2 Stress Tests
Advanced Credit Model Performance Testing to Meet Basel Requirements: How Things Have Changed!
Designing and Implementing a Basel II Compliant PIT–TTC Ratings Framework
Basel II in the Light of Moody’s KMV Evidence
Basel II Capital Adequacy Rules for Retail Exposures
IRB-Compliant Models in Retail Banking
Basel II Capital Adequacy Rules for Securitisations
Regulatory Priorities and Expectations in the Implementation of the IRB Approach
Market Discipline and Appropriate Disclosure in Basel II
Validation of Banks’ Internal Rating Systems – A Supervisory Perspective
Rebalancing the Three Pillars of Basel II
Implementing a Basel II Scenario-Based AMA for Operational Risk
Loss Distribution Approach in Practice
An Operational Risk Rating Model Approach to Better Measurement and Management of Operational Risk
Constructing an Operational Event Database
Insurance and Operational Risk
INTRODUCTION
The internal ratings-based capital regimes of the new Basel Accord (Basel II) will expose banks to potentially significant variation in their minimum capital requirements on credit risk due to credit ratings migration. This variation and its consequences, often referred to as the procyclicality of risk-sensitive capital requirements (see, eg, Erwin and Wilde 2001), are a concern both for both banks themselves and financial regulators alike. Individual banks will face an increasing challenge to steer their capital adequacy over time in order to meet the requirements of the regulator and the markets. Authorities in turn will have the stability of the financial system at their peril.
Many people in the industry have suggested that banks can accommodate the volatility in the minimum capital requirement through an adjustment of their capital buffers over the regulatory minimum requirements (see, eg, Borio, Furfine and Lowe 2001; Lowe 2002). This recommendation has also been adopted by the Basel Committee itself, which expects banks to conduct stress tests of capital adequacy as a means of determining the sufficiency of the capital buffers.11Basel Committee (2002) already
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