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Risk management

Basilea II
Fonte: http://it.wikipedia.org/wiki/Basilea_II 1 Motivazioni storiche dell'accordo 2 I principi cardine di Basilea II 3 Rischio operativo 3.1 Metodo Base (BIA) 3.2 Metodo Standard (TSA) 3.3 Metodo Avanzato (AMA) 4 Rischio di credito 4.1 Il rating 5 Metodologie di ponderazione del rischio di credito 5.1 Metodologia STANDARD (Standardized Approach) 5.2 Metodologia IRB Foundation (FIRB) 5.3 Metodologia IRB Advanced 6 Rischio di mercato 6.1 Metodo Standard 6.2 Metodo Avanzato 7 Pro e Contro di Basilea II: cosa cambier 8 Prospettive future: il problema delle PMI e il caso Italia 8.1 Basilea III 9 Basilea II e la funzione aziendale Finanza 10 Prospettive future e il differenziarsi degli istituti di credito: specializzarsi nel rischio 11 Note 12 Voci correlate 13 Collegamenti esterni Il Nuovo Accordo sui requisiti minimi di capitale firmato a Basilea , meglio noto come Basilea II, un accordo internazionale di vigilanza prudenziale, maturato nell'ambito del Comitato di Basilea[1], riguardante i requisiti patrimoniali delle banche. In base a esso, le banche dei Paesi aderenti devono accantonare quote di capitale proporzionate al rischio assunto, valutato attraverso lo strumento del rating. L'accordo strutturato in tre "pilastri": 1. Requisiti patrimoniali; 2. Controllo delle Autorit di vigilanza; 3. Disciplina di mercato e Trasparenza. Fonte: http://en.wikipedia.org/wiki/Basel_II Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face. One focus was to maintain sufficient consistency of regulations so that this does not become a source of competitive inequality amongst internationally active banks. Advocates of Basel II believed that such an international standard could help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Politically, it was difficult to implement Basel II in the regulatory environment prior to 2008, and progress was generally slow until that year's major banking crisis caused mostly by credit default swaps, mortgage-backed security markets and similar derivatives. The final version aims at: 1. Ensuring that capital allocation is more risk sensitive;

Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution; 3. Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques; 4. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital. Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all. The first pillar[edit] The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB, Advanced IRB and General IB2 Restriction. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches basic indicator approach or BIA, standardized approach or STA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). For market risk the preferred approach is VaR (value at risk). As the Basel II recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In the future there will be closer links between the concepts of economic and regulatory capital. The second pillar[edit] This is a regulatory response to the first pillar, giving regulators better 'tools' over those previously available. It also provides a framework for dealing with systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. Banks can review their risk management system. It is the Internal Capital Adequacy Assessment Process (ICAAP) that is the result of Pillar II of Basel II accords. The third pillar[edit] This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution. Market discipline supplements regulation as sharing of information facilitates assessment of the bank by others, including investors, analysts, customers, other banks, and rating agencies, which leads to good corporate governance. The aim of Pillar 3 is to allow market discipline to operate by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes, and the capital adequacy of the institution. It must be consistent with how the senior management, including the board, assess and manage the risks of the institution. When market participants have a sufficient understanding of a bank's activities and the controls it has in place to manage its exposures, they are better able to distinguish between banking organizations so that they can reward those that manage their risks prudently and penalize those that do not. These disclosures are required to be made at least twice a year, except qualitative disclosures providing a summary of the general risk management objectives and policies which can be made annually. Institutions are also required to create a formal policy on what will be disclosed and controls around them along with the validation and frequency of these disclosures. In general, the disclosures under Pillar 3 apply to the top consolidated level of the banking group to which the Basel II framework applies.

2.

Banking book
Fonte: http://www.investorwords.com/6739/banking_book.html#ixzz2jPV0Kmgk An accounting book that includes all securities that are not actively traded by the institution, that are meant to be held until they mature. These securities are accounted for in a different way than those in the trading book,

which are traded on the market and valued by the performance of the market. Fonte: http://www.bankpedia.org/index.php/it/88-italian/b/18684-banking-book Il banking book, in italiano portafoglio bancario una delle due categorie in cui rientrano le attivit degli enti finanziari. Le attivit che non sono contenute nel banking book vengono riferite al portafoglio di negoziazione, generalmente denominato trading book. In particolare, il banking book consiste in un portafoglio di propriet in cui sono detenute partecipazioni di natura strategica o verso controparti con le quali vi una relazione di lungo periodo. Attraverso il banking book passano gran parte delle transazioni (prestiti, depositi) di medio - lungo termine. Esso pu contenere strumenti detenuti per la vendita (Available for Sale o AFS) come le partecipazioni strumentali o detenuti fino a scadenza (Held to Maturity o HTM), strumenti che rappresentano finanziamenti, crediti e/o titoli obbligazionari (Loans & Receivable o L&R) come obbligazioni non quotate in mercato attivo. Va precisato tuttavia che il limite che separa il banking book dal trading book non mai stato definito formalmente ma deriva da vigilanza e normativa contabile.

Investment grade
Fonte: http://www.investopedia.com/terms/i/investmentgrade.asp A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds". Investors should note that government bonds, or Treasuries, are not subject to credit quality ratings. These securities are considered to be of the very highest credit quality. In the case of municipal and corporate bond funds, fund company literature, such as the fund prospectus and independent investment research reports will report an "average credit quality" for the fund's portfolio as a whole. Investors should be aware that an agency downgrade of a company's bonds from 'BBB' to 'BB' reclassifies its debt from investment grade to "junk" status with just a one-step drop in quality. The repercussions of such an event can be highly problematic for the issuer and can also adversely affect bond prices for investors. Safety-conscious fund investors should pay attention to a bond fund's portfolio credit quality breakdown.

Credit rating
Fonte: http://it.wikipedia.org/wiki/Rating Il rating, in italiano classificazione, un metodo utilizzato per valutare sia i titoli obbligazionari, sia le imprese (vedi anche modelli dirating IRB secondo Basilea 2) in base al loro rischio finanziario. Le valutazioni del rating sono emesse ad opera delle cosiddette agenzie di rating. Fonte: http://en.wikipedia.org/wiki/Credit_rating A credit rating is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government, but not individual consumers. The evaluation is made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default.[3]

Value at risk
Fonte: http://en.wikipedia.org/wiki/Value_at_risk

In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.[1][clarification needed] For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one day period if there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day out of 20 days (because of 5% probability). A loss which exceeds the VaR threshold is termed a VaR break.[2] VaR has four main uses in finance: risk management, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well.[3] Important related ideas are economic capital, backtesting, stress testing, expected shortfall, and tail conditional expectation.

Mark-to-market
Fonte: http://en.wikipedia.org/wiki/Mark_to_market_accounting Mark-to-market or fair value accounting refers to accounting for the "fair value" of an asset or liability based on the current market price, or for similar assets and liabilities, or based on another objectively assessed "fair" value.[citation needed] Fair value accounting has been a part of Generally Accepted Accounting Principles (GAAP) in the United States since the early 1990s, and is now regarded as the "gold standard" in some circles.
[1]

Mark-to-market accounting can change values on the balance sheet as market conditions change. In contrast, historical cost accounting, based on the past transactions, is simpler, more stable, and easier to perform, but does not represent current market value. It summarizes past transactions instead. Mark-to-market accounting can become volatile if market prices fluctuate greatly or change unpredictably. Buyers and sellers may claim a number of specific instances when this is the case, including inability to value the future income and expenses both accurately and collectively, often due to unreliable information, or over-optimistic or over-pessimistic expectations.

Tier 1 capital
Fonte: http://en.wikipedia.org/wiki/Tier_1_capital Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital,[1] which consists primarily of common stock and disclosed reserves (or retained earnings),[2] but may also include non-redeemable non-cumulative preferred stock. The Basel Committee also observed that banks have used innovative instruments over the years to generate Tier 1 capital; these are subject to stringent conditions and are limited to a maximum of 15% of total Tier 1 capital. This part of the Tier 1 capital will be phased out during the implementation of Basel III. Capital in this sense is related to, but different from, the accounting concept of shareholders' equity. Both Tier 1 and Tier 2 capital were first defined in the Basel I capital accord and remained substantially the same in the replacement Basel II accord. Tier 2 capital represents "supplementary capital" such as undisclosed reserves, revaluation reserves, general loan-loss reserves, hybrid (debt/equity) capital instruments, and subordinated debt. Each country's banking regulator, however, has some discretion over how differing financial instruments may count in a capital calculation. This is appropriate, as the legal framework varies in different legal systems.

The theoretical reason for holding capital is that it should provide protection against unexpected losses. Note that this is not the same as expected losses, which are covered by provisions,reserves and current year profits. In Basel I agreement, Tier 1 capital is a minimum of 4% ownership equity but investors generally require a ratio of 10%. Tier 1 capital should be greater than 150% of the minimum requirement.[citation needed] The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total risk-weighted assets (RWA). Riskweighted assets are the total of all assets held by the bank weighted by credit riskaccording to a formula determined by the Regulator (usually the country's central bank). Most central banks follow the Basel Committee on Banking Supervision (BCBS) guidelines in setting formulae for asset risk weights. Assets like cash and currency usually have zero risk weight, while certain loans have a risk weight at 100% of their face value. The BCBS is a part of the Bank of International Settlements (BIS). Under BCBS guidelines total RWA is not limited to Credit Risk. It contains components for Market Risk (typically based on value at risk (VAR) ) and Operational Risk. The BCBS rules for calculation of the components of total RWA have seen a number of changes following the Financial Crisis.[3] As an example, assume a bank with $2 of equity receives a client deposit of $10 and lends out all $10. Assuming that the loan, now a $10 asset on the bank's balance sheet, carries a risk weighting of 90%, the bank now holds risk-weighted assets of $9 ($10*90%). Using the original equity of $2, the bank's Tier 1 ratio is calculated to be $2/$9 or 22%. There are two different conventions for calculating and quoting the Tier 1 capital ratio:

Tier 1 common capital ratio and Tier 1 total capital ratio

Preferred shares and non-controlling interests are included in the Tier 1 total capital ratio but not the Tier 1 common ratio.[4] As a result, the common ratio will always be less than or equal to the total capital ratio. In the example above, the two ratios are the same.

Tier 2 capital
Fonte: http://en.wikipedia.org/wiki/Tier_2_capital Tier 2 capital, or supplementary capital, include a number of important and legitimate constituents of a bank's capital base.[1] These forms of banking capital were largely standardized in theBasel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord. National regulators of most countries around the world have implemented these standards in local legislation. In the calculation of regulatory capital, Tier 2 is limited to 100% of Tier 1 capital.

Risk-weighted asset
Fonte: http://en.wikipedia.org/wiki/Risk-Weighted_Asset Risk-weighted asset is a bank's assets or off-balance sheet exposures, weighted according to risk.[1] This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financial institution. In the Basel I accord published by the Basel Committee on Banking Supervision, the Committee explains why using a risk-weight approach is the preferred methodology which banks should adopt for capital calculation.[2]

it provides an easier approach to compare banks across different geographies off-balance-sheet exposures can be easily included in capital adequacy calculations

banks are not deterred from carrying low risk liquid assets in their books

Usually, different classes of assets have different risk weights associated with them. The calculation of risk weights is dependent on whether the bank has adopted the standardized or IRBapproach under the Basel II framework.[3] Some assets, such as debentures, are assigned a higher risk than others, such as cash or government securities/bonds. Since different types of assets have different risk profiles, weighing assets based on the level of risk associated with them primarily adjusts for assets that are less risky by allowing banks to discount lower-risk assets. In the most basic application, government debt is allowed a 0% "risk weighting" [4] - that is, they are subtracted from total assets for purposes of calculating the CAR. A document was written in 1988 by the Basel Committee on Banking Supervision which recommends certain standards and regulations for banks. This was called Basel I, and the Committee came out with a revised framework known as Basel II. More recently, the committee has published another revised framework known as Basel III.[5] The main recommendation of this document is that banks should hold enough capital to equal at least 8% of its risk-weighted assets.[6] The calculation of the amount of risk-weighted assets depends on which revision of the Basel Accord is being followed by the financial institution. Most countries have implemented some version of this regulation.[7]

Risk appetite
Fonte: http://en.wikipedia.org/wiki/Risk_appetite Risk Appetite is a method to help guide an organisations approach to risk and risk management. The level of risk that an organization is prepared to accept, before action is deemed necessary to reduce it. It represents a balance between the potential benefits of innovation and the threats that change inevitably brings. Levels of risk appetite[edit] The appropriate level will depend on the nature of the work undertaken and the objectives pursued. For example, where public safety is critical (e.g. operating a nuclear power station) appetite will tend to be low, while for an innovative project (e.g. early development on an innovative computer program) it may be very high, with the acceptance of short term failure that could pave the way to longer term success. Below are examples of broad approaches to setting risk appetite that a business may adopt to ensure a response to risk that is proportionate given their business objectives. Averse Avoidance of risk and uncertainty is a key organisation objective. Minimal Preference for ultra-safe options that are low risk and only have a potential for limited reward. Cautious Preference for safe options that have a low degree of risk and may only have limited potential for reward. Open Willing to consider all potential options and choose the one most likely to result in successful delivery, while also providing an acceptable level of reward and value for money. Hungry Eager to be innovative and to choose options offering potentially higher business rewards, despite greater inherent risk. The appropriate approach may vary across an organization, with different parts of the business adopting an appetite that reflects their specific role, with an overarching risk appetite framework to ensure consistency.

Risk-adjusted return on capital


Fonte: http://en.wikipedia.org/wiki/Risk_adjusted_return_on_capital Risk-adjusted return on capital (RAROC) is a risk-based profitability measurement framework for analysing riskadjusted financial performance and providing a consistent view of profitabilityacross businesses. The concept was developed by Bankers Trust and principal designer Dan Borge in the late 1970s.[1] Note, however, that more and more return on risk adjusted capital(RORAC) is used as a measure, whereby the risk adjustment of Capital is based on the capital adequacy guidelines as outlined by the Basel Committee, currently Basel III.[citation needed]

RAROC = (Expected Return)/(Economic Capital)[2] or RAROC = (Expected Return)/(Value at risk)[2]

Broadly speaking, in business enterprises, risk is traded off against benefit. RAROC is defined as the ratio of risk adjusted return to economic capital. The economic capital is the amount of money which is needed to secure the survival in a worst case scenario, it is a buffer against expected shocks in market values. Economic capital is a function of market risk, credit risk, andoperational risk, and is often calculated by VaR. This use of capital based on risk improves the capital allocation across different functional areas of banks, insurance companies, or any business in which capital is placed at risk for an expected return above the risk-free rate. RAROC system allocates capital for two basic reasons: 1. 2. Risk management Performance evaluation

For risk management purposes, the main goal of allocating capital to individual business units is to determine the bank's optimal capital structurethat is economic capital allocation is closely correlated with individual business risk. As a performance evaluation tool, it allows banks to assign capital to business units based on the economic value added of each unit.

Capital asset pricing model


Fonte: http://en.wikipedia.org/wiki/Capital_asset_pricing_model In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's nondiversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta () in the financial industry, as well as theexpected return of the market and the expected return of a theoretical risk-free asset. CAPM suggests that an investors cost of equity capital is determined by beta.[1]:2 An extension to the CAPM is the dual-beta model, which differentiates downside beta from upside beta.[2] The CAPM was introduced by Jack Treynor (1961, 1962),[3] William Sharpe (1964), John Lintner (1965a,b) and Jan Mossin (1966) independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Sharpe, Markowitz and Merton Miller jointly received the 1990 Nobel Memorial Prize in Economics for this contribution to the field of financial economics. Fischer Black (1972) developed another version of CAPM, called Black CAPM or zero-beta CAPM, that does not assume the existence of a riskless asset. This version was more robust against empirical testing and was influential in the widespread adoption of the CAPM. Despite more modern approaches to asset pricing and portfolio selection (like arbitrage pricing theory and Merton's portfolio problem, respectively) and apparent empirical flaws, CAPM still remains popular due to its simplicity and utility in a variety of situations.

Investment bank
Fonte: http://en.wikipedia.org/wiki/Investment_banking An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities). Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 (GlassSteagall Act) until 1999 (GrammLeachBliley Act), the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G8 countries, have historically not maintained such a separation. As part of the Dodd-Frank Act 2010, Volcker Rule asserts full institutional separation of investment banking services from commercial banking. There are two main lines of business in investment banking. Trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.) is the "sell side", while buy side is a term used to refer to advising institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy side entities. An investment bank can also be split into private and public functions with an information barrier which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information. An advisor who provides investment banking services in the United States must be a licensed broker-dealer and subject to Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation.[1]

Stress test
Fonte: http://en.wikipedia.org/wiki/Stress_test_(financial) A stress test, in financial terminology, is an analysis or simulation designed to the ability of a given financial instrument or financial institution to deal with an economic crisis. Instead of doing financial projection on a "best estimate" basis, a company or its regulators may do stress testing where they look at how robust a financial instrument is in certain crashes, a form of scenario analysis. They may test the instrument under, for example, the following stresses:

What happens if equity markets crash by more than x% this year? What happens if GDP falls by z% in a given year? What happens if interest rates go up by at least y%? What if half the instruments in the portfolio terminate their contracts in the fifth year? What happens if oil prices rise by 200%?

This type of analysis has become increasingly widespread, and has been taken up by various governmental bodies (such as the FSA in the UK) or inter-governmental bodies such as theEuropean Banking Authority and the International Monetary Fund) as a regulatory requirement on certain financial institutions to ensure adequate

capital allocation levels to cover potential losses incurred during extreme, but plausible, events. This emphasis on adequate, risk adjusted determination of capital has been further enhanced by modifications to banking regulations such as Basel II. Stress testing models typically allow not only the testing of individual stressors, but also combinations of different events. There is also usually the ability to test the current exposure to a known historical scenario (such as the Russian debt default in 1998 or 9/11 attacks) to ensure the liquidity of the institution. A bank stress test is a simulation based on an examination of the balance sheet of that institution.[1] Large international banks began using internal stress tests in the early 1990s. [2]:19 In 1996, the Basel Capital Accord was amended to require banks and investment firms to conduct stress tests to determine their ability to respond to market events.[2]:19 However, up until 2007, stress tests were typically performed only by the banks themselves, for internal self-assessment.[2]:1 Beginning in 2007, governmental regulatory bodies became interested in conducting their own stress tests to insure the effective operation of financial institutions.[2]:1 Since then, stress tests have been routinely performed by financial regulators in different countries or regions, to insure that the banks under their authority are engaging in practices likely to avoid negative outcomes. In India, legislation was enacted in 2007 requiring banks to undergo regular stress tests.[3] In October 2012, U.S. regulators unveiled new rules expanding this practice by requiring the largest American banks to undergo stress tests twice per year, once internally and once conducted by the regulators.[4]

Credit default swap (CDS)


Fonte: http://en.wikipedia.org/wiki/Credit_default_swap A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loandefault or other credit event. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults. It was invented by Blythe Masters from JP Morgan in 1994. In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan.[1] However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction; the payment received is usually substantially less than the face value of the loan. [2] Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2 trillion,[3] falling to $26.3 trillion by mid-year 2010[4] but reportedly $25.5[5] trillion in early 2012. CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency.[6] During the 2007-2010 financial crisis the lack of transparency in this large market became a concern to regulators as it could pose a systemic risk.[7][8][9][10] In March 2010, the [DTCC] Trade Information Warehouse (see Sources of Market Data) announced it would give regulators greater access to its credit default swaps database.[11] CDS data can be used by financial professionals, regulators, and the media to monitor how the market views credit risk of any entity on which a CDS is available, which can be compared to that provided by the Credit Rating Agencies. U.S. Courts may soon be following suit.[1] Most CDSs are documented using standard forms drafted by the International Swaps and Derivatives Association (ISDA), although there are many variants.[7] In addition to the basic, single-name swaps, there are basket default swaps (BDSs), index CDSs, funded CDSs (also called credit-linked notes), as well as loan-only credit default swaps (LCDS). In addition to corporations and governments, the reference entity can include a special purpose vehicle issuing asset-backed securities.[12]

Some claim that derivatives such as CDS are potentially dangerous in that they combine priority in bankruptcy with a lack of transparency.[8] A CDS can be unsecured (without collateral) and be at higher risk for a default.

Internal Ratings-Based Approach (Credit Risk)


Fonte: http://en.wikipedia.org/wiki/Internal_Ratings-Based_Approach_(Credit_Risk) Under the Basel II guidelines, banks are allowed to use their own estimated risk parameters for the purpose of calculating regulatory capital. This is known as the Internal Ratings-Based (IRB) Approach to capital requirements for credit risk. Only banks meeting certain minimum conditions, disclosure requirements and approval from their national supervisor are allowed to use this approach in estimating capital for various exposures.[1][2] The IRB approach relies on a bank's own assessment of its counterparties and exposures to calculate capital requirements for credit risk. The Basel Committee on Banking Supervision explained the rationale for adopting this approach in a consultative paper issued in 2001.[3] Such an approach has two primary objectives -

Risk sensitivity - Capital requirements based on internal estimates are more sensitive to the credit risk in the bank's portfolio of assets Incentive compatibility - Banks must adopt better risk management techniques to control the credit risk in their portfolio to minimize regulatory capital

To use this approach, a bank must take two major steps:

Categorize their exposures into various asset classes as defined by the Basel II accord Estimate the risk parametersprobability of default (PD), loss given default (LGD), exposure at default (EAD), maturity (M)that are inputs to risk-weight functions designed for each asset class to arrive at the total risk weighted assets(RWA)

The regulatory capital for credit risk is then calculated as 8% of the total RWA under Basel II.

Past due
Fonte: http://www.investopedia.com/terms/p/past-due.asp A loan payment that has not been made as of its due date. A borrower who is past due may be subject to late fees, unless the borrower is still within a grace period. Failure to repay a loan on time could have negative implications for the borrower's credit status or cause the loan terms to be permanently adjusted. If a loan payment is due by the 10th of the month and is not paid by the 11th, the payment will be considered past due. Depending on the policy of the lender, the borrower will either immediately be charged a late fee or will enter a grace period. If, for example, there is a grace period of 10 days, the borrower would not be charged a late fee until the 21st of the month. If the payment is still not made by the end of the grace period, late fees will then be applied. How a customer is treated on a past-due payment will often come down to their payment history; if there is a pattern of late payments, the grace period may be shortened or removed.

Junk bond
Fonte: http://www.investopedia.com/terms/j/junkbond.asp

A colloquial term for a high-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds. Junk bonds are risky investments, but have speculative appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them. A junk bond issued from a company that manages to turn its performance around for the better and has its credit rating upgraded will generally have a substantial price appreciation.