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FINANCIAL MARKET COURSES

Basel II & Basel 2.5

Regulatory capital requirements have evolved over time in an attempt to adequately guard against unexpected losses arising from various risks generated by financial institutions. From simple beginnings in the 1980s, the regulations have become ever more sophisticated in an attempt to capture the increasing subtleties of credit, market, and operational risk. Yet it would seem that such developments were insufficient to deal with an event on the scale of the global financial crisis.

 

This course describes the concept of capital adequacy and how the Basel requirements in relation to this have progressed from the simplicity of the original Basel capital accord (Basel I) in 1988 to the more sophisticated requirements of Basel II and Basel 2.5. All three “pillars” are covered – the minimum capital requirements set out in Pillar 1, the Pillar 2 supervisory review process, and the disclosure requirements mandated by Pillar 3.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe why banks need capital

    Explain the difference between solvency and liquidity

    Outline the evolution of regulatory capital requirements from the 1988 Basel Capital Accord (Basel I) to the "three pillars" approach of Basel II and the subsequent amendments made under Basel 2.5

    Describe the minimum capital requirements as set out in Pillar 1

    Explain the purpose of the supervisory review process as set forth in Pillar 2

    Outline the disclosure requirements mandated by Pillar 3

  • COURSE OUTLINE

    Topic 1: Evolution of Basel II

    Why Do Banks Need Capital?

    Capital, Solvency and Liquidity

    Capital as a Loss Absorber

    Economic versus Regulatory Capital

    Capital: An Analogy

    Basel I

    o How Risky is an Asset?

    What is Capital?

    o Tier 1

    o Tier 2

    o Tier 3

    What Represents a Sufficient Capital Ratio?

    o CAR: Example

    From Basel I to Basel II

    Basel II Implementation

    The Three Pillars

    Topic 2: The Need for Regulation

    Pillar 1

    Credit Risk

    o Standardized Approach (SA)

    o Internal Ratings-Based (IRB) Approach

    Securitization

    Basel II

    Basel 2.5

    Credit Risk Mitigation

    Market Risk

    o Standardized Measurement Method

    o Internal Models Approach

    o Revisions to Market Risk Framework (Basel 2.5)

    Operational Risk

    o Basic Indicator Approach (BIA)

    o The Standardized Approach (TSA)

    o Advanced Measurement Approaches (AMA)

    CAR: Formula

    Topic 3: Pillar 2 (Supervisory Review)

    The Need for Pillar 2

    Four Principles

    Supplemental Pillar 2 Guidance (Basel 2.5)

    Topic 4: Pillar 3 (Market Discipline)

    The Importance of Disclosure

    What Areas Require Disclosure?

    Strengthening Pillar 3 Requirements

    o Basel 2.5

    o Basel III

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    75 Minutes

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