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Week 2 Tutorial

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Eris Hoti
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4 views7 pages

Week 2 Tutorial

Uploaded by

Eris Hoti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Week 2 Tutorial

Basel I risk weights


Risk weight Loan category
0% Cash
Bonds issued by OECD governments
Central bank reserves
20% Loans to OECD banks
Loans to multilateral development banks
50% Mortgages secured on residential property

100% All other exposures (eg corporate loans)

2
Question 1: Calculation of capital
requirements
Bank A Bank B
Government bonds £100bn Government bonds £200bn

Mortgages £300bn Mortgages 0

Corporate loans £200bn Corporate loans £400bn

Capital requirement = 8% x risk-weighted assets


Question 2: The concept of VaR
Which of the following is true?

99% Value at Risk (VaR) tells us:

1. That with 99% certainty, losses on a portfolio will not exceed X


2. The maximum loss we might expect on a portfolio up to a 99%
certainty level
3. The expected loss on a portfolio
Question 3: Calculation of VaR
• Go to the FRED website and download a time series for the S&P
500
https://fred.stlouisfed.org/series/SP500#
• Calculate the standard deviation of daily returns
• What is the 99% Value at Risk over a 5-day horizon for a portfolio of
£1,000,000?
• How does this VaR compare to the actual (in sample) losses
experienced?
Question 4: Carney vs Haldane
“Regulation of modern finance is almost certainly too complex. That
configuration spells trouble... Because complexity generates uncertainty, it
requires a regulatory response grounded in simplicity, not complexity.”
Andy Haldane

“I thought Andrew Haldane’s speech was uneven... Basle I was simple and it
drove us off a cliff. Andrew Haldane’s conclusion is not supported by the
proper understanding of the facts…
…To have the leverage ratio bind before a risk-weighted approach, as Andy
suggests, then the natural incentive of an institution is going to be to fill up
the leverage ratio with the riskiest assets.”
Mark Carney

Assess these views. Who do you agree with?


Question 5: Bank capital
A bank approaches you, as supervisors, asking you to
approve the issuance of an innovative hybrid capital
instrument, which it wants to include in its Tier 1 capital.
The instrument is a subordinated bond (ie it’s junior to
deposits and senior debt) with a 10-year maturity.
It pays a fixed rate for 5 years, at which point it is callable (ie
the bank has the option to buy back the bond). If it does not
do so, the coupon on the bond “steps up” to a penal rate.

Should this instrument be included in the bank’s Tier


1 capital base?

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