VI. Capital Adequacy
Author:
International Monetary Fund. Legal Dept.
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Language:
English
Keywords:
SEM; bank; market; rating agency; CDR mechanism; ratings quality; requirement ratio; fair value accounting; Credit; Debt restructuring; Capital adequacy requirements; Financial sector stability; Global; Europe
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Abstract

Basel II mandates the maintenance of bank capital to address three broad categories of risk: credit risk, market risk and operation risk. Basel II methodology assumes that credit risk can be reliably specified with respect to particular asset categories. These projections are based on historical experience, reflected in data sets, which are at times general and at times specific to a particular institution. Basel II may have failed, however, to identify the strong shift in the correlation of defaults that accompanied the financial crisis. Market risk assessment displays similar issues of under-anticipated correlation under extreme conditions. Of the three categories, operational risk is the least tractable. It is a catch-all category, reflecting both internal failures and external events. The character of risk shifts markedly between “ordinary times” and extreme events. Consider this matrix:

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Cover Current Developments in Monetary and Financial Law, Volume 6
Current Developments in Monetary and Financial Law, Volume 6
Restoring Financial Stability--The Legal Response
Author:
International Monetary Fund. Legal Dept.
ISBN:
9781616350819
Publication Date:
08 Feb 2013
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781616350819.072
Pages:
590
Figure 1.

Bank Balance Sheet
Figure 2

Two country model (Cross-Border)
Figure 3

Two country model (Cross-Border)