Capital Modelling and Capital Management

What is Capital for?

• Concept of capital and its uses
• The bank balance sheet
• Asset and liability mix
• Net Interest Margin (NIM)
• The use of capital
• Different types of capital
• The allocation of capital
• Cost of Capital and Return on Capital (ROC and ROE)
• Economic capital
• Regulatory capital and its developments
• Original 1988 Basel Accord
• The market risk amendment of 1996 including internal models
• The Basel II Accord
• Current proposed revisions to Basel II into Basel III

  Review of Basic Credit Risk Capital Modelling Approach

• Building up the loss distribution
• Defining expected and unexpected loss
• Relationships to regulatory and rating agents limits
• Defining risk capital
• Interaction between main parameters
• Probability of default
• Exposure at default
• Loss given default
• The role of default correlation

Main Features of Basel II Approach to Credit Risk

• Introduction to three pillars approach
• Banking book and trading book split
• Credit risk in banking (loan) book
• Loss provisions and other adjustments to net interest income
• The Basel II standardised approach
• The Internal Ratings Based approach (IRB)
• Necessary risk management framework and other qualitative requirements for IRB and AIRB approaches

Impact of the IRB Approach

• Competition in credit markets
• Roots of the IRB methodology
• Correlation effects and modelling
• Effects over the credit cycle 

Other Credit Risk and Mitigants in Basel II

• Counter party credit risk in trading book
• Specific risk in trading book
• Use of collateral in lending
• Sale/Repurchase (Repo) arrangements
• "Wrong-way" risk
• Credit risk from derivatives usage
• Stress test and back testing of risk models 

Liquidity Risk – New Developments

• Distinguishing between solvency and liquidity
• Liquidity risk in funding the banks' balance sheet
• Interest income margin risk in banking book
• Liquidity risk in assets and liabilities marketability
• How liquidity risk played a major role in the credit crunch
• The role of the central bank as lender of last resort – Quantitative easing and other measures
• The Basel reaction to liquidity risk

Basel and Market Risk Capital

• Trading book instruments
• Mark to market and the impact of valuation policy
• Effect of mark-to-model vs. mark to market 

Basel and Internal Models for Market Risk 

• ″ Value-at-Risk models
• ″ Best practice and model development and usage
• ″ Add-ons to VaR models including stress and scenario testing
• ″ The role of back testing in model verification
• ″ What happens to VaR in a melt down?

The Other Basel Pillars – Supervision and Disclosure

• What are supervisors looking for?
• What disclosures have to be made?
• Looking at Pillar 3 disclosures in more detail 

Other Risk Types and Capital Charges

• Operational risk – what is it?
• Types of OR – the Basel Categories
• OR mitigants – insurance and outsourcing
• Modelling OR – basic and model methods
• Capital requirements for OR – Basel II
• Reputational risk
• Strategic risk
• Other types of risk? 

Capital Structure and Optimisation

• Types of capital instruments
• How capital structure effect capital ratios
• How do we optimise this?