Charles University in Prague Faculty of Social Sciences Institute of Economic Studies Credit Risk in the Macroprudential Framework: Three Essays DISSERTATION Author: PhDr. Jakub Seidler Supervisor: prof. Ing. Oldřich Dědek, CSc Academic Year: 2011/2012 Abstract This thesis focuses on proper credit risk identification with respect to macroprudential policies, which should mitigate systemic risk accumulation and contribute to higher financial stability of the financial sector. The first essay deals with a key credit risk parameter - Loss Given Default (LGD). We illustrate how the LGD can be estimated with the help of an adjusted Mertonian structural approach. We present a derivation of the formula for expected LGD and show its sensitivity analysis with respect to other company structural parameters. Finally, we estimate the five-year expected LGDs for companies listed on Prague Stock Exchange and find that the average LGD for the analyzed sample is around 20-50%. The second essay examines the issue of how to determine whether the observed level of private sector credit is excessive in the context of the "countercyclical capital buffer", a macroprudential tool proposed in the new regulatory framework of Basel III by the Basel Committee on Banking Supervision. An empirical analysis of selected Central and...

This dissertation explored the efficacy of the new Basel III banking standards in SACU, grounded on the conjecture that they are not reflective of economies of SACU, but are merely an intensification of Basel II, rather than a substantial break with it. Firstly, loans and assets were tested for causality, since Basel III believes growth in these variables led to securitization. The leverage ratio has been introduced in Basel III as an anti-cyclical buffer. The OLS technique was employed to test for its significance in determining growth in bank assets. SACU feels the impact of debt, with credit is marginally treated in Basel III and is not introspective of the realities of its economies. ANOVA tests using debt, credit and GDP were done to determine a better method of addressing cyclicality. The leverage ratio was insignificant in Namibia, with debt and credit having momentous impacts on GDP in SACU. / Economics / M. Com. (Economics)

La crise financière globale de 2007-2009 a révélé la fragilité des banques modernes ainsi que les carences de la réglementation. A la suite de la crise, le secteur bancaire a connu des réformes réglementaires importantes : renforcement de la régulation micro-prudentielle, mise en place de dispositifs ayant des objectifs macroprudentiels et diverses initiatives de séparation des activités. Dans ce contexte, cette thèse, en s’appuyant sur les données américaines, essaie dans un premier temps d’expliquer la vulnérabilité des banques par leurs caractéristiques financières et leur structure organisationnelle. Ensuite, la thèse propose une analyse de l’efficacité de certains nouveaux outils dans le cadre des réformes. Nous trouvons les résultats suivants : 1) Le risque de faillite est plus élevé chez les banques qui adoptent des stratégies agressives pendant la période d’euphorie économique et qui se financent par des fonds instables. Une maison-mère saine (bien capitalisée et rentable) est une source de force des filiales bancaires. Cela vient étayer l’introduction du coussin de capital contracyclique et du ratio de liquidité dans Bâle III. 2) La diversification des activités contribue à la baisse du risque bancaire alors que les engagements croissants en activités non-traditionnelles volatiles semble rendre les banques plus vulnérables. Ceci conforte la nécessité d'une réforme structurelle pour certaines banques universelles. 3) Les ratios de levier prévoient mieux la probabilité de faillite des grandes banques que le ratio pondéré par les risques, tandis que les deux types de ratios sont aussi efficaces pour prévoir la faillite des petites banques. Ce résultat souligne l’importance du renforcement de la réglementation des banques systémiques et implique sa mise en œuvre. / The 2007-2009 global financial crisis reveals the fragility of modern banking sector and the flaws in bank regulation. In the wake of the crisis, an important number of reforms are carried out: enhancement of micro-prudential regulation, introduction of macro-prudential instruments and separation of activities. In this context, this thesis, using detailed information on the U.S. banking sector, tries to explain bank vulnerability by their financial characteristics and organizational structure. Then the thesis analyzes the efficiency of some new regulatory instruments. Our findings are the following: 1) Banks adopting an aggressive business model in economic boom and banks funded massively with instable liabilities are more likely to fail. A healthy (well-capitalized and profitable) bank holding company is a source of strength for its bank subsidiaries. These findings support the introduction of the countercyclical capital buffer and of the requirements on liquidity in the Basel III framework. 2) A high degree of diversification across different banking activities is associated with important risk reduction benefits while the expansion in non-traditional activities seems to make banks more vulnerable. This indicates the necessity of structural reform for certain universal banks. 3) The leverage ratios are more efficient in predicting failures of large banks than the risk-weighted capital ratio whereas the two types of capital ratios predict the failures of small banks as well as each other. These findings go in line with the reinforcement of regulation on systemically important banks.

The theme of this diploma thesis is the capital adequacy of Czech banks in the context of macro-prudential policy. The aim of this diploma thesis is quantitative and qualitative analysis of the capital ratios of the Czech banking sector in the context of Basel III and CRD IV capital regulation. The work for the selected period analyzes the development of the capital structure of the Czech banking sector as a whole and for individual segments of banks. The work also focuses on the determinants that influenced the capital changes in addition to the change in the volume of capital itself. The resistance of the banking sector to the unfavorable development of the financial system is analyzed through the stress tests of the Czech National Bank.

While the 2008 financial crisis has come and gone, its effects on the global financial sector still show. Globalisation has since changed the way that banks do business, and increased competitiveness and with it the level of risk within the international banking community. Therefore, because of these prolonged effects of the financial crisis and the rise in the level of risk in banking, regulators deemed it fit to make the global financial sector safer and sounder. As a result, the BASEL III Capital Accord was introduced with tighter capital adequacy and liquidity ratio requirements; as well as also introducing the leverage ratio. In this paper, through the study of the rules and regulations on banks in South Africa, Brazil and China, it was discovered that all three countries have since begun the implementation of the new Accord as from January 2013. While preparatory measures may be different, there is a general sense of regulatory alignment among the three countries. By analysing the capital adequacy, liquidity and leverage ratios of the three countries, it was also established that these ratios are interconnected, with the capital adequacy ratio being the most important one. The study concludes that, with proper implementation of these ratios and effective management, countries implementing the BASEL III regulations would be in a stronger position to achieve soundness in their banking systems. / Gutu, Taurai Fortunate

L'objectif de cette thèse est double : évaluer, mesurer et analyser les effets de contagion sur les banques américaines et européennes lors la crise financière globale de 2008-2009 et étudier les canaux financiers qui ont contribué à la propagation de la crise aux pays du G7. En suivant une approche microéconomique de la définition de la contagion, nous testons, premièrement, l'hypothèse d'un effet de « contagion » sur les marchés boursiers à l'aide de la méthode des études d'évènements. Nous qualifions ensuite la contagion de « contagion pure » ou de « contagion rationnelle ». Deuxièmement, nous testons l'hypothèse de « contagion » contre « interdépendance » sur le marché des dérivés de crédit avec les modèles de corrélations conditionnelles asymétriques dynamiques. En troisième lieu, nous cherchons à répondre à une question macroéconomique : quel choc joua le rôle majeur dans la transmission de la crise financière globale, celui dû à la pénurie de liquidité ou celui provoqué par la dévaluation des actifs financiers? Pour cela, nous analysons, à l'aide d'un modèle vectoriel autorégressif à paramètres qui varient dans le temps, l'effet de chaque choc, venu des États-Unis, sur les marchés monétaires et boursiers des pays du G7. Enfin, nous questionnons l'intérêt de la régulation Bâle 3 portant sur le capital des banques du point de vue des banques contaminées durant la crise financière globale. / The objective of this thesis is the twofold: to assess, measure and analyze contagion effects to American and European banks during the global financial crisis of 2008-2009 and to study the financial channels that contributed to the spread of the crisis to G7 countries. Following a microeconomic approach of the definition of contagion, firstly, we test the hypothesis of “contagion” on stock markets using the event study methodology. Then, we qualify it as “pure contagion” or “rational contagion”. Secondly, we test the hypothesis of “contagion” versus “interdependence” on credit derivative market using the asymmetric dynamic conditional correlations models. Thirdly, we aim to answer a macroeconomic issue: which shock played the major role in spreading the crisis from U.S. to money and stock markets of G7 countries, the shock due to liquidity shortage or the shock due to the devaluation of financial assets? We use a Time-Varying Parameters Vector-Auto Regression methodology. Finally, we provide insights into the impact of Basel III regulation of banks capital, by focusing on banks contaminated during the global financial crisis.

In the thesis we analyse changes in derivatives valuation after the financial crisis and their impact on behaviour of financial institutions. We focus mainly on the changes related to counterparty credit risk and valuation adjustments. We describe in economical terms the relationship between counterparty credit risk and traditional credit risk, we also introduce management and modelling of this risk. In second part of the study we analyse the regulatory framework, in particular new capital requirement and mandatory central clearing of OTC derivatives. We discuss inconsistencies between regulatory and internal approaches to the counterparty risk measurement and also significant systemic risk connected to central counterparties. Finally we investigate the impact of changes in derivatives valuation on banks in both the EU and the Czech Republic. Specifically we are interested in optimal approach to entering into derivative trade.

This diploma thesis deals with countercyclical measures of Basel III which will come into force in future. Thesis outlines the issue of cyclical effects which appeared in connection with application of Basel II and provides basic information about new treatment of this issue in Basel III. Further the thesis discusses preparedness of the czech banking sector for the introduction of countercyclical buffers and possibility of Tier I capital formation which should be the main part of the new bank capital adequacy including the capital buffers in future. Subsequently this thesis informs about conditions of using the countercyclical buffers and examines possible appropriate timing for their application. In the other parts of the thesis three selected foreign banking sectors and czech banking sector are examinated with the main focus on their weak spots and their possible development in the case of application of Basel III before the beginning of the world economic crisis in 2007 . In the end the stability of the czech banking sector is examined in detail by using the crisis scenarios and also the impact of application of Basel III before 2007 is discussed.

L'objectif de cette thèse est de fournir à la banque Audi un outil à jour sur les façons de calculer le capital requis par Bâle pour certains risques financiers présents dans le portefeuille de la banque. La régulation internationale est en développement continu : des nouvelles approches sont proposées afin de couvrir au mieux les risques du marché et du secteur bancaire. Les crises financières récentes étaient à la base de ces réformes. De plus, la Banque Audi opère sur des marchés qui présentent des caractères spécifiques qu'il faut prendre en considération lors du calcul du capital requis. Cette thèse se concentre sur le risque de taux d'intérêt dans le livre de négociation de la banque, le risque de contrepartie et précisément l'ajustement d'évaluation de crédit tout en incorporant l'impact de la corrélation entre la qualité du crédit de la contrepartie et l'exposition prévue envers cette même contrepartie. La première partie de cette thèse traite de la nouvelle méthodologie suggérée par Bâle sur le Trading Book : Fundamental Review of the Trading Book. Le risque de taux d'intérêt est particulièrement analysé en utilisant la méthode standard, Sensitivity Based Approach (SBA), et des méthodes plus 'traditionnelles' de valeur à risque tout en utilisant différents modèles tels que Generalized Auto Regressive Conditional Heteroscedasticity (GARCH), l'Analyse en Composantes Principales (ACP), l'Analyse en composantes indépendantes (ACI) et la version dynamique du modèle de taux de Nelson Siegel (DNS). Une application sur des portefeuilles d'obligations zéro coupons de différentes devises permet d'identifier la diversification des résultats entre les marchés stables européens (comme la France), moins stables (exemple Etats-Unis) et les marchés émergents (tel la Turquie). La deuxième partie est consacrée au risque de Contrepartie. Récemment, un nouveau capital est requis par les normes de Bâle afin de couvrir ce genre de risque. En 2014, la méthode est publiée : Standardized Approach for Counterparty Credit Risk (SA-CCR). On applique cette méthode sur différents types de produits dérivés afin de comparer le capital demandé par cette approche à celui obtenu par les modèles internes. Les modèles internes incorporent les estimations historiques ainsi que les projections futures du marché tout en se basant sur des modèles bien connus tels que Vasicek et GARCH. Plusieurs structures de hedging sont mises en place afin de mesurer l'impact de chacune sur les deux montants de capitaux requis (sous la méthode standard ou l'IMM). L'effet sur des produits en EUR et USD reflété que le modèle interne demande 80% du capital standard quand aucune stratégie de hedging n'est mise en place. Par contre, le hedging semble être beaucoup plus favorisé par le modèle standard que le modèle interne. La troisième partie est toujours sur le risque de Contrepartie, mais se focalise sur l'ajustement d'´évaluation de crédit (CVA). Ce sujet ne faisait pas partie des capitaux requis sauf récemment. A cause de son grand impact durant les récentes crises financières. Dès lors, si une opération avec des produits dérivés ne passe pas par une central clearing houses, un capital pour le CVA est requis. Dans ce travail, on détaille les méthodes acceptées par Bâle afin de calculer ces capitaux et on les compare entre elles. La comparaison se fait en se basant sur des portefeuilles de swap de taux d'intérêts avec, comme contreparties, différents pays d'Investment Grade. Cet article incorpore en plus l'impact de la corrélation entre la détérioration de la qualité de la contrepartie et l'augmentation de l'exposition prévue avec cette contrepartie connue sous le nom de WrongWay Risk : des modèles de correction d'erreurs (ECM) sont mis en place afin de déterminer ce lien. Les résultats permettent de montrer l'importance d'utiliser les CDS des contreparties et non de se limiter à leur note (Investment Grade ou pas)... / This thesis aims at providing Bank Audi with an updated tool to understand and investigate in given risk types encountered in their portfolios and the way Basel suggests computing their capital charges. International regulator is constantly changing and modifying previously used approaches to enhance the reflection of the market and banking sector risks. The recent financial crisis played a major role in these reforms, in addition the situation of Bank Audi and the markets it is operating in, represent certain specifications that should be accounted for. The work handles interest rate risk in the trading book, Counterparty Credit Risk faced with derivatives along a closer look on the Credit Valuation Adjustment topic and the incorporation of Wrong Way Risk. The first part discusses the new Fundamental Review of the Trading Book: focusing on the general interest rate risk factor, the paper compared Basel’s Sensitivity Based Approach (SBA) capital charge to more traditional approaches of VaR using several models such as Generalized Auto Regressive Conditional Heteroscedasticity (GARCH), Principal Components Analysis (PCA), Independent Components Analysis (ICA) and Dynamic Nelson Siegel. Application on portfolios with zero coupon bonds of different sovereigns revealed the divergence in results between stable markets (such as France and Germany), less stable (such as the USA) and emergent markets (such as Turkey). The second part is dedicated to the Counterparty Credit Risk. A new capital charge methodology was proposed by Basel and set as a standard rule in 2014: the Standardized Approach for Counterparty Credit Risk (SA-CCR). Applying this approach on different derivatives portfolios, we compared it to internal models. The internal methodologies incorporated historical estimations and future projections based on Vasicek and GARCH models. Different hedging cases were investigated on EUR and USD portfolios. The impact of each hedging technique and the difference between IMM and the standardized methods were highlighted in this work: without hedging, the internal approach amends 80% of the standardized capital whereas, in general, the hedging is encouraged more under the standardized approach relatively to its capital reduction under the internal model. The third part remains a part of the Counterparty Credit Risk however, the main focus in this work is the Credit Valuation Adjustment. This topic was neglected in terms of capital charge earlier but due to its important impact is now incorporated as a capital charge amended when no central clearing is put in place when dealing with derivatives. We focus on the regulatory approaches of capital computation, comparing both accepted approaches based on portfolios of interest rate swaps held with investment grade sovereigns. An incorporation of the Wrong Way Risk is another addition in this work: using Error Correction Models we were able to reflect the impact of the correlation between the exposure and the credit quality of the investment grade sovereign we are dealing with. Based on such results, a suggestion of a re-calibrated standardized approach is in place to encourage the use of the CDS as an indicator of the credit quality of the counterparty and not its grade (investment or not) as followed by the new Basel regulations

Kříčková, V. The Impact of the new Basel III Rules on the Czech Banking Sector. Di-ploma thesis. Brno: Mendel University, 2019. Diploma thesis is aimed at analysis of the new rules of banking regulation Basel III and their impact on the Czech banking sector. It describes the development of the rules issued by the Basel Committee on Banking Supervision, their structure and then compares their differences. The thesis also presents an analysis of expert studies and empirical research on Basel III and its potential impact on the bank-ing sector and economy. It also deals with the impact of new regulation require-ments on selected indicators of banking sector performance and selected banks. The last part of the thesis deals with an outline of possible future development of banking regulation with a focus on the Czech banking sector.