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Exposure At Default
Exposure at default (EAD) is a parameter used in the calculation of economic capital or regulatory capital under Basel II for a banking institution. It can be defined as the gross exposure under a facility upon default of an obligor. Outside of Basel II, the concept is sometimes known as credit exposure (CE). It represents the immediate loss that the lender would suffer if the borrower (counterparty) fully defaults on its debt. The EAD is closely linked to the expected loss, which is defined as the product of the EAD, the probability of default (PD) and the loss given default (LGD). Definition In general, EAD is seen as an estimation of the extent to which a bank may be exposed to a counterparty in the event of, and at the time of, that counterparty’s default. EAD is equal to the current amount outstanding in case of fixed exposures such as term loans. For revolving exposures like lines of credit, EAD can be divided into drawn and undrawn commitments; typically the drawn ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Economic Capital
In finance, mainly for financial services firms, economic capital (ecap) is the amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as a going concern, such as market risk, credit risk, legal risk, and operational risk. It is the amount of money that is needed to secure survival in a worst-case scenario. Firms and financial services regulators should then aim to hold risk capital of an amount equal at least to economic capital. Typically, economic capital is calculated by determining the amount of capital that the firm needs to ensure that its realistic balance sheet stays solvent over a certain time period with a pre-specified probability. Therefore, economic capital is often calculated as value at risk. The balance sheet, in this case, would be prepared showing market value (rather than book value) of assets and liabilities. The first accounts of economic capital date back to the ancient Phoeni ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Regulatory Capital
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and risk becoming insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Capital is a source of funds, not a use of funds. From the 1880s to the end of the First World War, the capital-to-assets ratios globally declined sharply, before remaining relatively steady during the 20th century. Regu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III. The Basel II Accord was published in June 2004. It was a new framework for international banking standards, superseding the Basel I framework, to determine the minimum capital that banks should hold to guard against the financial and operational risks. The regulations aimed to ensure that the more significant the risk a bank is exposed to, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Basel II attempted to accomplish this by establishing risk and capital management requirements to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending, investment and trading activities. One focus was to maintain sufficient consistency of regulations so to limit competiti ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Expected Loss
Expected may refer to: *Expectation (epistemic) *Expected value In probability theory, the expected value (also called expectation, expectancy, expectation operator, mathematical expectation, mean, expectation value, or first Moment (mathematics), moment) is a generalization of the weighted average. Informa ... * Expected shortfall * Expected utility hypothesis * Expected return * Expected loss See also * Unexpected (other) * Expected value (other) {{disambig ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Probability Of Default
Probability of default (PD) is a financial term describing the likelihood of a default over a particular time horizon. It provides an estimate of the likelihood that a borrower will be unable to meet its debt obligations. PD is used in a variety of credit analyses and risk management frameworks. Under Basel II, it is a key parameter used in the calculation of economic capital or regulatory capital for a banking institution. PD is closely linked to the expected loss, which is defined as the product of the PD, the loss given default (LGD) and the exposure at default (EAD). Overview The probability of default is an estimate of the likelihood that the default event will occur. It applies to a particular assessment horizon, usually one year. Credit scores, such as FICO for consumers or bond ratings from S&P, Fitch or Moodys for corporations or governments, typically imply a certain probability of default. For group of obligors sharing similar credit risk characteristics su ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Loss Given Default
Loss given default or LGD is the share of an asset that is lost if a borrower defaults. It is a common parameter in risk models and also a parameter used in the calculation of economic capital, expected loss or regulatory capital under Basel II for a banking institution. This is an attribute of any exposure on bank's client. Exposure is the amount that one may lose in an investment. The LGD is closely linked to the expected loss, which is defined as the product of the LGD, the probability of default (PD) and the exposure at default (EAD). Definition LGD is the share of an asset that is lost when a borrower defaults. The ''recovery rate'' is defined as 1 minus the LGD, the share of an asset that is recovered when a borrower defaults. Loss given default is facility-specific because such losses are generally understood to be influenced by key transaction characteristics such as the presence of collateral and the degree of subordination. How to calculate LGD The LGD calcula ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
F-IRB
{{Basel II The term Foundation IRB or F-IRB is an abbreviation of foundation internal ratings-based approach, and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions. Under this approach the banks are allowed to develop their own empirical model to estimate the PD (probability of default) for individual clients or groups of clients. Banks can use this approach only subject to approval from their local regulators. Under F-IRB banks are required to use regulator's prescribed LGD (Loss Given Default) and other parameters required for calculating the RWA (Risk-Weighted Asset Risk-weighted asset (also referred to as RWA) is a bank's assets or off-balance-sheet exposures, weighted according to risk. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financi ...) for non-retail portfolios. For retail exposures banks are required to use their ow ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
A-IRB
The term Advanced IRB or A-IRB is an abbreviation of advanced internal ratings-based approach, and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions. Under this approach the banks are allowed to develop their own empirical model to quantify required capital for credit risk. Banks can use this approach only subject to approval from their local regulators. Under A-IRB banks are supposed to use their own quantitative models to estimate PD (probability of default), EAD (exposure at default), LGD ( loss given default) and other parameters required for calculating the RWA (risk-weighted asset). Then total required capital is calculated as a fixed percentage of the estimated RWA. Reforms to the internal ratings-based approach to credit risk are due to be introduced under the Basel III: Finalising post-crisis reforms. Some formulae in internal-ratings-based approach Some credit assessments in standardised ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Revolving Credit
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Credit cards are an example of revolving credit used by consumers. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day operations. They were first introduced by the Strawbridge and Clothier Department Store. It is an arrangement which allows for the loan amount to be withdrawn, repaid, and redrawn again in any manner and any number of times, until the arrangement expires. Credit card loans and overdrafts are revolving loans, also called evergreen loan. Typical characteristics * The borrower may use or withdraw funds up to a pre-approved credit limit. * The amount of available credit decreases and increases as funds are borrowed and then repaid. * The credit may be used repeatedly. * The borrower makes payments based only on the amount used or withdrawn, plus interest. * The borrower may repay over time (subj ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Capital Requirement
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and risk becoming insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Capital is a source of funds, not a use of funds. From the 1880s to the end of the First World War, the capital-to-assets ratios globally declined sharply, before remaining relatively steady during the 20th century. Reg ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Basel Committee On Banking Supervision
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (G10) countries in 1974. The committee expanded its membership in 2009 and then again in 2014. As of 2019, the BCBS has 45 members from 28 jurisdictions, consisting of central banks and authorities with responsibility of banking regulation. The committee agrees on standards for bank capital, liquidity and funding. Those standards are non-binding high-level principles. Members are expected but not obliged to undertake effort to implement them e.g. through domestic regulation. Overview The committee provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The committee frames guidelines and standards in different areas – some of the better known among them are the inte ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Bank Regulation
Banking regulation and supervision refers to a form of financial regulation which subjects banks to certain requirements, restrictions and guidelines, enforced by a financial regulatory authority generally referred to as banking supervisor, with semantic variations across jurisdictions. By and large, banking regulation and supervision aims at ensuring that banks are safe and sound and at fostering market transparency between banks and the individuals and corporations with whom they conduct business. Its main component is prudential regulation and supervision whose aim is to ensure that banks are viable and resilient ("safe and sound") so as to reduce the likelihood and impact of bank failures that may trigger systemic risk. Prudential regulation and supervision requires banks to control risks and hold adequate capital as defined by capital requirements, liquidity requirements, the imposition of concentration risk (or large exposures) limits, and related reporting and public di ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
