Total capital

≥ 8%
RWA Credit + [MRCMarket × 12.5]+[ORCOpr'l × 12.5]
• Undisclosed reserves
• Asset revaluation reserves Tier 2
Credit Risk 
• General provisions or
“Supplementary”
loan loss reserves
(only here in Tier 2)
2) Operational
Operational Risk 
• Hybrid debt capital instruments
(Cumulative preferred stock) Market Risk 
• Subordinated term debt
Tier 3
• To meet market risk capital
Tier 1 • Equity capital: issued
capital: issued &
requirements only
“Core” fully paid common stock
• Non-cumulative, non-redeemable • Short-term subordinated debt
preferred stock • Maturity at least 2 years
• Disclosed reserves • With covenant limiting payment
• (Excludes Goodwill) if impairs
impairs bank’s
bank’s capital
capital requirement
 Credit Operational
Risk  Risk 
External Rating
Standardized Basic Indicator Approach (BIA)
Claim
Type
∑ (GI i × α )
i =last three years
K Operational ,BIA =
$100 MM loan × 20% (AAA) × 8% capital = $1.6 MM 3
$100 MM loan × 100% ( BB-) × 8% capital = $8.0 MM
Three Elements (IRB)
Standardized Approach (SA)
1. Risk Components Internal Estimate  ASA
2. Risk-weight functions   Retail ◄ Volume
3. Minimum requirements Foundation IRB  ∑ max [∑ (GI lines 1−8 × βlines 1-8 ),0 ] Comm’l◄ Volume
K SA =  
i =last three years

Corporate, Sovereign
Advanced Measurement
& Bank Exposures
Approach (AMA)
• Capital for UL only
• EL with provisions PD EAD LGD M Elements
Must
Elements
Should Have
Have Internal External Scenario Controls
RWA=12.5 × EAD × K Data Data Analysis & Tools
K = LGD × PD × f(M) Mitigation
 Internal Measurement Approach (IMA)
Different IRB Treatment γ (i,j) ∗ EI(i , j ) ∗ PE(i , j ) ∗ LGE(i , j )
Advanced IRB
Retail Equities Loss Distribution Scorecard Correlations
1. Residential Mortgage Supervisor Supplied Approach (LDA) Approach
2. Qualifying Revolving
Purchased
3. Small Bus Loans Receivables Market
Scope Risk 
Mitigation (CRM) Securitization
Trading Book 
Fixed-Income
Standardized Equities Banking Book 
Simple True-sale conditions:
Substitute 1. risk to 3rd party Currencies Currencies
2. seller doesn’t control
Collateral Risk Weight Commodities Commodities
3. securities not obligations
4. SPE holder rights
Comprehensive External Rating
Reduce Exposure by Collateral (+ haircuts)
Tranche Standardized (sum the building blocks)
E* = (E + H) - (C - H - Hfx)
MRCtStandard = ∑ IR,EQ,FX ,CO,OP MRCt
IRB Approach
Foundation Derivatives
Internal Models Approach (IMA)
External
Senior: 45% LGD
Foundation Ratings-based (RBA) Qualitative Requirements Stress Testing
Subord: 75% LGD
LGD
Collateral Supervisory
Formula (SF) Backtesting
LGD
 E* 


E 


Advanced
Internal Assessment
• 10 day horizon VaR Green: <5 exceptions
LGD • 99% confidence
Approach (IAA)
• One year of data Yellow: 5-9 k+
0.4 -
• Quarterly updating Red: 10+ 1.0
 Credit
Risk 
External Rating
Standardized
Claim
Type
$100 MM loan × 20% (AAA) × 8% capital = $1.6 MM
$100 MM loan × 100% (BB-) × 8% capital = $8.0 MM
Three Elements (IRB)
1. Risk Components Internal Estimate
2. Risk-weight functions
3. Minimum requirements Foundation IRB

Corporate, Sovereign
& Bank Exposures

• Capital for UL only

• EL with provisions PD EAD LGD M
RWA=12.5 × EAD × K
K = LGD × PD × f(M)

Different IRB Treatment

Advanced IRB
Retail Equities
1. Residential Mortgage Supervisor Supplied
2. Qualifying Revolving
Purchased
3. Small Bus Loans Receivables
 Mitigation (CRM) Securitization

Standardized
Simple True-sale conditions:
Substitute 1. risk to 3rd party
2. seller doesn’t control
Collateral Risk Weight
3. securities not obligations
4. SPE holder rights
Comprehensive External Rating
Reduce Exposure by Collateral (+ haircuts)
Tranche
E* = (E + H) - (C - H - Hfx)

IRB Approach
Foundation Derivatives
External
Senior: 45% LGD
Foundation Ratings-based (RBA)
Subord: 75% LGD
LGD
Collateral Supervisory
 E*  Formula (SF)
LGD   Advanced
 
E  LGD
Internal Assessment
Approach (IAA)
 Market
Scope Risk 

Trading Book 
Fixed-Income

Equities Banking Book 

Currencies Currencies

Commodities Commodities

Standardized (sum the building blocks)

IR,EQ,FX ,CO,OP 
MRCStandard
t =∑ MRCt
Internal Models Approach (IMA)
Qualitative Requirements Stress Testing

Backtesting
• 10 day horizon VaR Green: <5 exceptions
• 99% confidence
• One year of data Yellow: 5-9 k+
0.4 -
• Quarterly updating Red: 10+ 1.0
 Operational
Risk 

Basic Indicator Approach (BIA)

∑ (GI i × α )
i =last three years
K Operational ,BIA =
3

Standardized Approach (SA)

 ASA
  Retail ◄ Volume
 ∑ max [∑(GI lines 1−8 × βlines 1-8 ),0] Comm’l◄ Volume
K SA =  
i =last three years

Advanced Measurement
Approach (AMA)
Elements Elements
Must Should Have
Have Internal External Scenario Controls
Data Data Analysis & Tools
 Internal Measurement Approach (IMA) Mitigation

γ (i,j) ∗ EI(i , j ) ∗ PE(i, j) ∗ LGE( i , j)

Loss Distribution Scorecard Correlations
Approach (LDA) Approach
 Second
Pillar

Key principles of supervisory review

1. Rigorous bank process
• Board, Sr mgmt oversight
• Capital assessment
• Total risk assessment
• Monitoring & reporting
• Internal control review
2. Supervisor review
• Good targets, processes
• Captial adequacy
• Control envirnonment
• Min. standard compliance
• Response (as needed)

3. Supervisor response 4. Supervisor intervention

Specific Issues to be Addressed

• Banking book interest rate risk
Operational Risk 
Credit Risk  • Gross income as proxy
• IRB stress tests
• Definition of default
• Trading book eligibility
• Residual risk • Valuation
• Concentration risk • IMA: Stress testing
• Counterparty risk • IMA: Specific risk model
Market Risk 
 Third
Pillar
Qualitative disclosures Quantitative disclosures
Tier 1 with breakdowns,
Capital structure
Tier 2 & 3, deductions, total eligible

Capital adequacy Credit risk, equity in IRB, market

risk, operational risk, Total & Tier 1

Risk exposure and assessment

General qualitative disclosure
• strategies & processes
• organization of risk mgmt function
• scope & nature of risk reporting & measurement
• Policies for, and monitoring of, hedging & mitigation

Credit risk definitions of past due, impaired;

allowance approaches, policies
Additional requirement under IRB approaches

Market risk capital requirements for: interest rate

risk, equity position, FX and commodity

Operational Risk description of approaches;

if AMA, factor and insurance

Banking book equities investment values, public/private,

 gain/loss from sale, req by group

Banking interest rate value change for rate shock,

broken down by currency