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Irm201920 4
Irm201920 4
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Standardized Approach
• Much more granular than Basel I SA.
• Extends the sensitivity approach to all risk classes.
Sharp rise in capital requirements with 1% shock.
• There are seven risk classes: General Interest Rate
Risk, Credit Spread Risk ( CSR, non-securitization),
CSR (securitization), CSR (correlation trading), FX
Risk, Equity risk, Commodity risk,
• It uses three measures – delta, vega and curvature risk
factor sensitivities for all risk classes.
Vega and curvature risks are estimated for option positions.
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Standardized Approach
• Risk weights, sensitivity and correlations given for
maturity vertices, ratings, sectors and currency types.
• Default Risk Charge aligned to the Banking Book
Treatment, to avoid discrepancy.
• Residual risk add-on – risk weights on notional for
nonlinear instruments – to capture other risks.
• Total capital charge = Sensitivity-based Charge +
Default Risk Charge + Residual Risk Charge.
• Simplified SA – scaled SA (1996) – also proposed.
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Revised IMA
• Model approval at the desk level – regulatory
permission for migration to IMA more difficult.
• Stressed Expected Shortfall (ES) at 97.5% c.l. as the
relevant loss measure, instead of 99% VaR.
• Stressed ES (based on reduced set of risk factors)
must be scaled (using ES under normal conditions)
to include all risk factors.
• Stressed ES based on a 12-month stressed period.
• Default risk Charge and Non-modellable Risk
Charges to be added.
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Revised IMA
• Liquidity horizons higher for most classes.
Hedging could reduce capital burden if liquidity horizons for
underlying and hedge instruments are different.
• Capital charge: Higher of previous day loss estimates
and scaled average of last 60-business day estimates.
• The capital multiplier increases from 1.5 to 2, as the
number of 99% VaR violations rises from four to ten.
Banks compare VaR with both clean and dirty P&L.
• P&L attribution captures the sources of daily
variations in P&L.
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