Term
| Advantages of Stress test |
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Definition
1. forward looking assessment of risks
2. more precise than analyzing aggregated indicators |
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Term
| Disadvantages of Stress test |
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Definition
1. views banks portfolios as static not dynamic
2. ignores the role of non-quantitative factors |
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Term
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Definition
1. cover a significant part of the system
2. banks larger than 50 billion
3. 2x per year |
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Term
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Definition
1. GDP growth
2. Unemployment rate
3. home price apperciation |
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Term
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Definition
| indicates a bank has more rate sensitive assets than liabilities |
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Term
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Definition
| A bank has more rate sensitive liabilities than assets |
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Term
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Definition
| Measurement of interest rate risk |
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Term
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Definition
1. easy to understand
2. works well with small changes in interest rate |
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Term
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Definition
1. ignores time value of money
2. ignores cumulative impact of interest rate changes
3. considered demand deposits to be non-rate sensitive
4. interest rates attached to banks assets and liabilities do not move as quickley as market rate |
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Term
| Steps to reduce interest rate risk |
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Definition
1. calculate periodic GAP over short time intervals
2. much fund repriceable assets with similar repriceable liabilities
3. match fund long-term assets with noninterest-bearing liabilities
4. use off balance sheet transactions |
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Term
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Definition
| measuring interest rate risk with duration GAP |
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Term
| Ecnomioc value of equity analysis |
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Definition
| focuses on changes in stockholders equity given potential changes in interest rates |
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Term
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Definition
| compares price sensitivity of a banks total assets with price sensitivity of its total liabilities to asess the impact of potential changes in interest rates on stockholders equity |
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Term
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Definition
| measure of the average life of a bond |
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Term
| Bond price relationship with the coupon rate |
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Definition
| varies inversely with the coupon rate. the larger the bond coupon rate, the smaller the price change for a given change in yield |
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Term
| Bond price volatility and maturity |
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Definition
| longer term bonds are more price sensitive to changes in interest rates, because the distant CF are more subjected to interest rate changes |
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Term
| 4 Steps in Duration GAP analysis |
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Definition
1. Management develops interest rate forecast
2. managements estimates the market value of bank assets, liabilities, and stockholders equity
3. management estimates the weighted duration of assets and weighted duration of liabilities
4. management forecasts changes in market value of STCK equity across different interest rate environments |
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Term
| tasks performed by capital |
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Definition
1. cushion against risk of failure
2. provides funds to help institutions get started
3. promotes public confidence
4. provides funds for growth |
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Term
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Definition
1. common stock
2. preferred stock
3. equity reserves
4. subordinated debentures |
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Term
| Reasons for capital regulation |
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Definition
| private marketplace does not correctly price the impact of systematic failures |
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Term
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Definition
1. banks that want to expand more rapidly must get capital from external sources
2. harder for small banks, expensive
3. sources of capital
- common, preferred stock
- equity reserves
- subordinated debentures |
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Term
| Advantages to Subordinated Debt |
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Definition
1. Interest payments are tax-deductible
2. generates additional profits for shareholders as long as earning before interest and taxes exceed interest payments |
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Term
| Disadvantages of Subordinated Debt |
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Definition
1. interest and principal payments are mandatory
2. imposes interest expense burden on bank
3. many issues require sinking funds
4. does not qualify as tier 1 or core capital |
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Term
| Advantages of Common Stock |
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Definition
1. preferred by regulators as source of external capital
2. no fixed maturity
3. losses can be charged against equity |
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Term
| Disadvantages of Common Stock |
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Definition
1. not attractive from bank's perspective due to its high cost
2. dividends are not tax-deductible
3. transaction costs on issuing |
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Term
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Definition
| form of equity in which investors claims are senior to those of common stockholders |
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Term
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Definition
1986
regulators proposed that US banks be required to maintain capital that reflects the riskiness of bank assets |
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Term
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Definition
| a banks minimum capital requirement is linked to its credit risk |
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Term
| Basel Agreement of 1988 designed to |
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Definition
1. encourgae banks to keep their capital positions strong
2. promote fair competition
3. account for financial innovations |
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Term
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Definition
| common & preferred stock,undivided dividends,minority interest in the equity accounts of subsideries |
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Term
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Definition
| Allowance for loan losses, subordinated debt instruments,unpaid dividends, equity notes |
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Term
| Tier 1 Risk-based capital ratio |
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Definition
| tier 1 capital/ total risk-weighted assets |
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Term
| Total Risk-based Capital Ratio |
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Definition
| Tier 1 capital + tier 2 capital/ total risk-weighted assets |
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Term
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Definition
- government securities, currency, guaranteed balance by depository institutions
- risk weight: 0% |
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Term
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Definition
- Federal agency securities, repurchase agreements
- Risk weight: 20% |
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Term
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Definition
- Loans secured by 1-4 family properties, revenue bonds
- Risk Weight: 50% |
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Term
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Definition
- bank loans, premises, other assets
- Risk Weight: 100% |
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Term
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Definition
| based on what the parties to the accord negotiated rather than on the actual risk of each asset |
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Term
| Variation in Credit Quality |
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Definition
- banks discovered a wide variation in credit quality within risk-weighted categories
- Basel I groups all commerical loans into the *% capital category |
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Term
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Definition
if a loan is calculated to have an internal capital charge that is low compared to the 8%, the bank has a strong incentive to undertake regulatory capital arbitrage
- mainly done through securitization |
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Term
| Weaknesses of the Risk-Based Capital Standards |
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Definition
1. standards initially only consider credit risk (ignores interest rate risk and liquidty risk)
2. ingnores changes in the market value of assets |
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Term
| Banks' own Capital allocation models |
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Definition
1. enabled due to advances in technology and finance
2. let them more accuratly calculations of bank capital than possible under BASEL I
3. models allowed banks to align the amount of risk they undertook on a loan with the overall goals of the bank |
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Term
| New Approach to Risk-Based Capital |
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Definition
| 1. effort focused on using banks' internal rating models and internal risk models |
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Term
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Definition
1. Minimum Capital requirement
2. supervisory review process
3. market disipline |
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Term
| Minimum Capital Requirements (BASEL II) |
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Definition
| capital requirements for credit, market, and operational risk |
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Term
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Definition
| supervisory review of an institutions capital adequacy and internal assesment process |
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Term
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Definition
| effective use of market disipline as a lever to stengthen disclosure and encourage safe and sound banking practices |
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Term
| Basel II Capital Standards |
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Definition
| was mainly based on credit risk, did not address operational or other types of risk |
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Term
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Definition
| if a banks own calculations show that they have very risky loss-prone loans, their formal risk based capital charges should also be high |
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Term
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Definition
| requires supervisors to review a banks capital adequecy assessment process, which may indicate higher capital requirements than pillar 1 minimums |
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Term
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Definition
| US authorites are currencly considering what banks should publicaly disclose about their basel II calculations |
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Term
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Definition
1. the largest banks will opperate under a system that is different than used by other banks
2. implications of this long-term competition between these banks is uncertian but needs further attention
3. Basel II proposals rely on banks' own internal risk estimates
4. for regulators evaluating the integrity of the banks' models this is a big step
5. elevate the importance of human judgement |
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Term
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Definition
december 16th 2010
- global regulatory framework for resiliant banks and banking systems |
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Term
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Definition
Total Quality Equity
= total equity - intangible assets- good will - preferred stock |
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Term
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Definition
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Term
| two standard proposed to manage liquidity risk |
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Definition
1. Liquidity Coverage Ratio (LCR)
- for short term 30 days liquidity risk management under stress scenario
2. Net Stable Funding Ratio (NSFR)
- for longer term structual liquidity mismatches |
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Term
| Fundamental Charateristics of Liquid assets |
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Definition
1. low credit and market risk
2. ease and certainty of valuation
3. low correlation with risky assets
4. listed in a developed and recognized exchange |
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Term
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Definition
Community Reinvestment act 1977
- make banks service their community more, and have an obligation to serve local communities when in need |
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Term
| Small Bank performance standards |
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Definition
1. loan-to-deposit ratio
2. precentage of credit activities in the bank's assessment area
3. record of bank's credit advances
4. geographic distribution of loans
5. action take in response to written complaints with respect to CRA |
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Term
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Definition
| affordable housing for low or moderate income, activities that promote economic development by financing businesses or farms. |
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Term
| Large Banks performance standards |
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Definition
1. lending test(largest)
- evaluates a banks record of helping to meet the credit needs of its assessment area through its lending activities
2. investment test
- evaluates a banks record of helping to meet the credit needs of its assessment area through qualified investments and grants
3. service test
- evaluated a banks record of helping its assessment area by analyzing both the availability and effectiveness of a banks delivering retail banking services |
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