Regulatory Capital and Economic Capital

This course covers the topical issues relating to banking risks, how much capital banks have and how much regulators require them to allocate against different risks.

The course also discusses the differences between economic and regulatory capital and the expected increase of capital requirements following the credit crisis.

Regulatory requirements for banks

• Overview of regulatory framework
  • Role of BIS, EU directives and national implementation
  • The FSA’s role
• Basel I and Capital Adequacy Directive
• Banking book vs. trading book classification
  • Credit risk requirements for the banking book
  • Market risk requirements for the trading book, coupled with daily marking-to-market
• Tier 1 and total capital ratios
  • Reconciliation with balance sheet items
  • Deduction of holdings in other banks
• Overview of Basel II implications
  • Credit risk re-measurement
    • Standardised approach
    • Internal ratings based approach
  • Operational risk: definition and measurement

Economic capital vs. regulatory capital and economic profit

• What is economic capital?
• Inputs into economic capital
• Why economic profit?
• Key value driver
• Value creation and performance measurement
• Differences between economic capital and regulatory capital
• Uses in the bank’s internal performance measurement

Expected regulatory tightening due to credit crisis

• Overhaul of capital requirements for investment banking type activities. Key areas:
• Securitisations
• Market risk
• Counterparty incremental risk
• Role of rating agencies
• Procyclicality in capital and provisions
• Depositors protection