Capital Modelling and Capital Management Training Course

Understand in detail how regulatory and economic capital interact in the post credit crunch world.

In this course we will look in detail at how capital requirements are modelled and how these capital requirements can be managed under the existing and likely new regulations.

This intensive course focuses on the Basel regime and how it has developed and where it is likely to go.

A combination of lectures and structured workshops will give delegates a detailed understanding of 'Capital Modelling and Management of Capital' in the current and likely future frameworks.
 

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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

Workshop: Calculating credit risk capital requirement for simple portfolios

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

Workshop: Looking at provisions and capital over the credit cycle

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

Workshop: Likely impact of new rules on liquidity

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?

Workshop: Stressing VaR

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?

Discussion: The future of capital management with the likely provision of Basel III and other legislation

This new and intensive two-day course offers the unique opportunity to:

• Understand how both economic and regulatory capital are defined for the major risk areas
• Evaluate the latest techniques for risk and capital estimation
• Understand the evolution of the Basel rules and how they are implemented
• Look at the new developments and requirements for Basel III
• Understand the role of Liquidity Risk and its new found importance post ‘Credit Crunch'
• Look in detail how capital can be optimised for regulatory, tax and accounting reasons
• Review practical features of capital management and techniques for optimisation