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Capital: Point of Non-Viability and Loss Absorbability
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In a bid to strengthen financial stability, regulators are cracking down on capital requirements for banks. The latest developments in capital adequacy ratios (CAR) aim to ensure that institutions can withstand economic shocks without resorting to government bailouts.
Regulatory Overhaul
The Basel III accord introduced stricter definitions and increased base requirements for CAR. This move is designed to prevent a repeat of the 2008 global financial crisis, where banks’ lack of capital led to widespread failures.
Capital Conservation and Countercyclical Buffers
In addition to CAR, regulators are introducing capital conservation measures and countercyclical buffers to ensure that banks maintain sufficient capital during periods of economic stress. These measures will help prevent a buildup of risk-taking behavior before economic downturns.
Systemically Important Financial Institution Surcharges
Global systemically important financial institutions (G-SIFIs) will face higher capital requirements due to their increased systemic risk. This move aims to mitigate the potential impact of these institutions’ failures on the broader financial system.
Basel III and Consistency in Risk-Weighted Asset Calculation
The Basel III accord also introduced consistency in risk-weighted asset (RWA) calculation, which will help reduce regulatory arbitrage and ensure that banks are properly reflecting their risks on their balance sheets.
Liquidity Risk and Leverage Ratio
In a separate session, regulators discussed the importance of liquidity risk management. The Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were introduced to ensure that institutions maintain sufficient liquid assets and stable funding sources.
Leverage Ratio: Key Requirements
The 3% leverage ratio aims to prevent excessive leveraging by financial institutions. This requirement will help reduce systemic risk and promote more prudent risk-taking behavior.
Sessions
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Session Three: Liquidity Risk and Leverage Ratio
- Mark Dougherty, a renowned risk management consultant, led the discussion on liquidity risk management and the importance of maintaining sufficient liquid assets.
- The session covered the criteria for inclusion as High Quality Liquid Assets (HQLA) and the introduction of the Global Liquidity Standard.
Session Four: Living Wills (Recovery and Resolution Plans)
Regulators discussed the Basel III requirements on living wills, which aim to ensure that financial institutions have effective recovery and resolution plans in place. The session covered the importance of good corporate governance and defining what “good” looks like in practice.
Session Five: Basel IV
The final session focused on the latest developments in Basel IV, which includes revisions to the standardized methodology for credit risk, a new approach for counterparty credit risk, and changes to internal ratings-based methods. The discussion also covered the implementation timeline, regulatory views, and potential impact of Basel IV on credit risk capital.
Seminar Speaker
Mark Dougherty, a full-time risk management consultant with over 30 years of experience in financial institutions, led the seminar. His extensive knowledge in risk management and corporate governance made him an engaging and informative speaker.