Den första januari 2007 träder nya regler om bankernas kapitaltäckning i kraft, Basel II. Dessa syftar till att stärka det finansiella systemet samt effektivisera bankernas riskhantering. Som en del i regelverket ingår att bankerna skall genomföra en samlad kapitalbedömning och genom denna bedömning öppnas nya möjligheter för bankernas riskhantering. Vårt syfte är att med utgångspunkt i portföljvalsteori analysera och diskutera en portföljansats möjlighet som verktyg för att förbättra riskhanteringsprocessen i en banks kreditverksamhet. Inledningsvis beskrivs det nya regelverket och fokus läggs sedan vid en av regelverkets delar, kapitalbedömningsprocessen. Som en del av denna process föreslås en portföljansats och vi illustrerar de speciella problem som uppkommer vid portföljoptimering av krediter med hjälp av en exempelportfölj. Tonvikten läggs på behovet av stora mängder rätt data samt korrekta antagande om hur risken i krediter skall mätas. Med utgångspunkt i de resultat som portföljoptimeringen ger, föreslås slutligen en mer individualiserad prissättning och värdepapperisering som möjliga åtgärder i syfte att förbättra riskprofilen i en kreditportfölj.

Basel II kommer att få positiva effekter inom banksektorn, bland annat för att bankerna genom mer riskkänsliga metoder att beräkna kreditrisk kan sänka sin kapitalbas utan att samtidigt sänka kapitaltäckningsgraden under den lagstadgade nivån. Det medför att bankerna får större möjligheter att differentiera villkoren för enskilda krediter än tidigare utan att detta påverkas av reglerna för kapitaltäckning. Det innebär i sin tur att konkurrensen inom banksektorn ökar. Den nya lagen innebär att kapitalkraven för kreditrisk minskar generellt, men mest för banker som utvecklar egna interna riskhanteringsmetoder (IRK) och banker med hög andel hushållslån (inklusive bostadslån) i sin kreditportfölj. I takt med att mer riskkänsliga metoder utvecklas och en ökad riskprövning sker på engagemangsnivå, får bankerna incitament att finna olika lösningar på kundens behov. Resultaten kommer att bli ökad konkurrens, större specialisering och ökad differentiering av krediter. Ökad konkurrens innebär att kundens ställning förbättras. Ett mer differentierat utbud av krediter kommer att medföra större valmöjligheter för bankernas kunder. Bankerna blir samtidigt mer selektiva och väljer bort kunder som inte är önskvärda ur risksynpunkt. Kunder med dålig återbetalningsförmåga och sämre säkerheter kommer att få svårare att få krediter eller sämre villkor. Även om mindre banker i någon mån missgynnas av att schablonmetoden är mindre riskkänslig än interna riskklassificeringsmetoder (IRK) är det inte en så stor nackdel att det påverkar deras konkurrenssituation. De två sparbanker som studerats har en mycket god soliditet, och en kapitaltäckningsgrad som väl överskrider lagens krav. De nya reglerna kommer att ytterligare höja kapitaltäckningsgraden för kreditrisk – allt annat oförändrat. Genom den årliga interna kapitalutvärdering kan dessutom även små banker utnyttja kvalificerade metoder för att beräkna sin samlade risk, och därigenom vid behov sänka sina kapitalkrav. Möjlighet för små banker att utnyttja de interna ratinguppgifter som stora banker förfogar över genom sina interna riskklassificeringsmetoder skulle dock förbättra de små bankernas konkurrenskraft.

This dissertation investigates the implications of using the Advanced Measurement Approaches (AMA) as a method to assess operational risk capital charges for banks and insurance companies within Basel II paradigms and with regard to U.S. regulations. Operational risk has become recognized as a major risk class because of huge operational losses experienced by many financial firms over the last past decade. Unlike market risk, credit risk, and insurance risk, for which firms and scholars have designed efficient methodologies, there are few tools to help analyze and quantify operational risk. The new Basel Revised Framework for International Convergence of Capital Measurement and Capital Standards (Basel II) gives substantial flexibility to internationally active banks to set up their own risk assessment models in the context of the Advanced Measurement Approaches. The AMA developed in this thesis uses actuarial loss models complemented by the extreme value theory to determine the empirical probability distribution function of the overall capital charge in terms of various classes of copulas. Publicly available operational risk loss data set is used for the empirical exercise.

Syftet med studien var att undersöka vilken inverkan den senaste finanskrisen och de internationella ramverken har haft på de svenska respektive danska bankernas bolåneräntor. Studien eftersträvade även att undersöka vilka likheter och skillnader som finns mellan olika typer av banker samt mellan de korta respektive de långa bolåneräntorna. Författarna valde att använda sig av en kvalitativ metod med en deduktiv ansats som tillvägagångssätt. Det genomfördes kvalitativa intervjuer med personer vid ett antal noga utvalda banker för att ge en så bra och detaljerad bild som möjligt av problemområdet. Respondenterna fick stort utrymme att föra sina egna diskussioner för att vidare mynna ut i väldefinierade resultat. Resultatet av denna studie visar att svenska och danska banker är positivt inställda till införandet av de nya bestämmelserna och tror att det kommer bidra till en stabilare marknad. Finanskrisen har lett till att bankernas finansieringskostnader har ökat liksom användandet av ränteswappar. Bankerna finansierar även sin verksamhet på längre sikt vilket gör att den blir dyrare att bedriva.

Diss.--Copenhagen Business School, 2007.

South Africa will be implementing Basel II on 1 January 2008. Basel II provides regulatory capital requirements for credit risk, market risk and operational risk. The purpose of capital requirements is to level the playing field for all internationally active banks and to protect consumers against these risks. Although there is an obvious threat of liquidity risk and it is important to correctly measure and manage liquidity risk, it is almost glaringly omitted from Basel II. The result of not managing liquidity risk properly may have dire consequences for banks because a liquidity crisis may happen without warning. Therefore, the aim of this study was to explore current practices and to propose guidelines for effective liquidity risk regulation in South Africa. A literature study and quantitative analysis on liquidity risk in South Africa were conducted to assess whether it is valid for regulators to require banks to hold capital for liquidity risk. This study provides conclusions and recommendations on the regulatory treatment of liquidity risk in South Africa under Basel II. Although Pillar 2 reviews a variety of other risks and not only liquidity risk, it is proposed that the liquidity risk part of such reviews is conducted on the basis of a questionnaire used to determine possible gaps between banks' practices and prescribed criteria regarding the management and measurement of liquidity risk. It is important to note that such an approach has a constraint in terms of the substantial amount of work that would have to be done on the regulation of liquidity risk by both regulators and banks. Therefore resource constraints and the cost versus the benefit of such an approach would have to be considered carefully. The all-encompassing conclusion to this study is that capital would not be an effective mitigant for liquidity risk for a number of reasons. Liquidity risk differs from bank to bank and a general capital charge for all banks may not be sensible, therefore liquidity risk should be analysed on a bank-by-bank basis. In other words, capital could be charged for liquidity risk under Pillar 2(b) of Basel II. Such a capital charge would not serve the purpose of covering losses resulting from liquidity risk, but would instead impose a penalty on banks that are deemed to manage and measure liquidity risk imprudently. Such a penalty would typically be quite small but would serve as an incentive for banks to improve their management and measurement techniques to the desired level as set out by prescribed criteria. The criteria that should be used for determining whether banks measure and manage liquidity risk prudently should be of such a nature that the Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) complies with Basel Core Principle 14: Liquidity Risk in regulating liquidity risk. In addition, it should align the criteria used to the 14 Principles for the sound management of liquidity as prescribed by the Bank for International Settlements and the Institute of International Finance. Furthermore, it is proposed that the BSD should not prescribe to banks which methods to use to report their liquidity risk, because all banks are not the same in terms of size and sophistication. For this reason, banks should be allowed to follow an internal models approach for liquidity risk whereby banks are, subject to regulatory approval, allowed to use their own internal liquidity risk measures to report liquidity risk to the BSD. This approach is similar to the approach followed by the Bundesbank in Germany. A liquidity risk questionnaire could be drafted according to which banks' liquidity risk management and measurement is assessed in terms of the sound Principles for managing liquidity risk and the Basel Core Principles. One questionnaire could be used for the purposes of assessing the quality of banks' liquidity risk management and measurement in terms of a Supervisory Review and Evaluation Process (SREP) as well as for banks applying for approval of an internal models approach for liquidity risk. The same questionnaire could be used for both purposes, or the questionnaire could be divided into two clear sections whereby all banks are required to answer the SREP (or Pillar 2(b)) section, and only banks applying for the use of an internal models approach for liquidity risk are required to complete this section. A further conclusion to this study is that the BSD should publish a framework in which its approach to regulating liquidity risk is described in detail. Some aspects that should be included in such a document include a widely-accepted definition for liquidity risk and guidelines/minimum standards for measurement and management techniques for liquidity risk and the process that will be followed under Pillar 2 of Basel II. If the BSD is concerned about the level of potential liquidity risk in the South African banking system, it should consider having the additional instruments that are eligible as collateral included as instruments eligible for liquid asset reserve requirements. An additional mitigant for liquidity risk may be that the BSD requires banks to report their liquidity risk more frequently than the current monthly basis. / Thesis (M.Com. (Risk Management))--North-West University, Potchefstroom Campus, 2008.

A topical issue in financial economics is the development of appropriate stochastic dynamic models for banking items and behavior. The issue here is to fulfil the need to generalize the more traditional discrete-time models of banking activity to a Levy process setting. In this thesis, under the assumption that the loan market is imperfectly competitive, we investigate the evolution of banking items such as bank assets (cash, bonds, shares, Treasuries, reserves, loans and intangible assets), liabilities (demand deposits) and bank capital (bank equity, subordinate debt and loan loss reserves). Here we consider the influence of macroeconomic factors and profitability as well as its indicators return on assets (ROA) and return on equity (ROE). As far as bank assets are concerned, we note that loan pricing models usually reflect the financial funding cost, risk premium to compensate for the risk of default by the borrower, a premium reflecting market power exercised by the bank and the sensitivity of the cost of capital raised to changes in loans extended. On the other hand, loan losses can be associated with an offsetting expense called the loan loss provision (LLP), which is charged against Nett profit. This offset will reduce reported income but has no impact on taxes, although when the assets are finally written off, a tax-deductible expense is created. An important factor influencing loan loss provisioning is regulation and supervision. Measures of capital adequacy are generally calculated using the book values of assets and equity. The provisioning of loans and their associated write-offs will cause a decline in these capital adequacy measures, and may precipitate increased regulation by bank authorities. Greater level of regulation generally entail additional costs for the bank. Currently, this regulation mainly takes the form of the Basel II Capital Accord that has been implemented on the worldwide basis since 2008. It is clear that bank profitability is a major indicator of financial crises for households, companies and financial institutions. An example of this from the 2007-2008 subprime mortgage crisis (SMC) is the U.S. bank, Wachovia Corp., who reported a big loss as from the first quarter of 2007 and eventually was bought by the world's largest bank, Citigroup, on 29 September 2008. A further example from the SMC is that both the failure of the Lehman Brothers investment bank and the acquisition in September 2008 of Merrill Lynch and Bear Stearns by Bank of America and JP Morgan Chase, respectively, were preceded by a decrease in profitability and an increase in the price of loans and loan losses. The subprime mortgage crisis is characterized by contracted liquidity in the global credit markets and banking system. The level of liquidity in the banking sector affects the ability of banks to meet commitments as they become due without incurring substantial losses from liquidating less liquid assets. Liquidity, therefore, provides the defensive cash or near-cash resources to cover banks' liability. An undervaluation of real risk in the subprime market is cascading, rippling and ultimately severely adversely affecting the world economy. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects tumbled as the US housing market slumped. Banks worldwide are hoarding cash and showing a growing reluctance to lend, driving rates that institutions charge to each other on loans to record highs. Also, global money markets are inoperative, forcing increased injections of cash from central banks. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework. The stochastic dynamics of the aforementioned banking items assist in formulating a maximization problem that involves endogenous variables such as profit consumption, the value of the bank's investment in loans and provisions for loan losses as control variants. In particular, we demonstrate that the bank is able to maximize its expected utility of discounted profit consumption over a random time interval, [t,r], and terminal profit at time r. Here the term profit consumption refers to the consumption of the bank's profits by dividend payments on equity and interest and principal payments on subordinate debt. The associated Hamilton-Jacobi-Bellman (HJB) equation has a smooth solution when the optimal controls are computed by means of power, logarithmic and exponential utility functions. This enables us to make a direct comparison between the economic properties of the solutions for different choices of the utility function. In keeping with the main theme of this thesis, we simulate the financial indices ROE and ROA that are two measures of bank profitability. We further discuss optimization with power utility where we show the convergence of the Markov Chain Approximation Method (MCAM) and the impact of varying the model parameters in the form of loan loss severity, P, and loan loss frequency, <f>. We investigate the connections between the banking models and Basel II capital accord as well as the current subprime mortgage crises. As a way of conclusion, we provide remarks about the main issues discussed in the thesis and speculate about future research directions. The contents of this thesis is based on 3 peer-reviewed journal articles (see [105], [106] and [107]) and 1 peer-reviewed conference proceedings paper (see [104]). In addition, the paper [108] is currently being prepared for submission to an accredited journal. / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2009.

Basel II provides banks with four options that may be used to calculate regulatory capital for operational risk. Each of these options (except the most basic approach) requires an underlying risk measurement and management system, with increasing complexity and more refined capital calculations under the more advanced approaches. Approaches available are BIA, TSA, ASA and AMA. The most advanced and complex option under Basel II is the AMA. This approach allows a bank to calculate its regulatory and economic capital requirements (using internal models) based on internal risk variables and profiles, rather than exposure proxies like gross income. This is the only risk–sensitive approach allowed by and described in Basel II. Accompanying internal models, complex and sophisticated measurement instruments, risk management processes and frameworks, as well as a robust governance structure need to be implemented. This study focuses on the practical design and implementation of an AMA capital model. This includes a beginning–to–end solution for capital modelling and covers all elements of data analysis, capital calculation and capital allocation. The proposed capital model is completely risk–based, leading to risk–sensitive capital calculations and allocations for all business lines in a bank. The model was constructed to comply fully with all Basel II requirements and standards. The proposed model was subsequently applied to one South African bank’s operational risk data, i.e. risk scenario and internal loss data of the bank were used as inputs into the proposed capital model. Regulatory capital requirements were calculated for all business lines in the bank and for the bank as a whole on a group level. Total capital requirements were also allocated to all business lines in the bank. For regulatory capital purposes, this equated to the stand–alone capital requirement of each business line. Calculations excluded the modelling and incorporation of insurance, expected loss offsets and correlation. These capital mitigation techniques were, however, proposed as part of the comprehensive capital model. AMA based capital calculations for the bank’s business lines resulted in significant capital movements compared to TSA capital requirements for the same calculation periods. The retail banking business line was allocated less capital compared to corresponding TSA estimates. This is mainly attributable to lower levels of tail risk exposure given high income levels (which are the bases for TSA capital calculations). AMA–based capital for the investment banking business line was higher than corresponding TSA estimates, due to high levels of extreme risk exposure relative to income generated. Employing capital modelling results in operational risk management and performance measurement was discussed and proposals made. This included the use of capital requirements (modelling results) in day–to–day operational risk management and in strategic decision making processes and strategic risk management. Proposals were also made on how to use modelling results and capital allocations in performance measurement. It was proposed that operational risk capital costs should be included in risk–adjusted performance measures, which can in turn be linked to remuneration principles and processes. Ultimately this would incentivise sound operational risk management practices and also satisfy the Basel II use test requirements with regards to model outputs, i.e. model outputs are actively used in risk management and performance measurement. / Thesis (Ph.D. (Risk management))--North-West University, Potchefstroom Campus, 2012.

South Africa will be implementing Basel II on 1 January 2008. Basel II provides regulatory capital requirements for credit risk, market risk and operational risk. The purpose of capital requirements is to level the playing field for all internationally active banks and to protect consumers against these risks. Although there is an obvious threat of liquidity risk and it is important to correctly measure and manage liquidity risk, it is almost glaringly omitted from Basel II. The result of not managing liquidity risk properly may have dire consequences for banks because a liquidity crisis may happen without warning. Therefore, the aim of this study was to explore current practices and to propose guidelines for effective liquidity risk regulation in South Africa. A literature study and quantitative analysis on liquidity risk in South Africa were conducted to assess whether it is valid for regulators to require banks to hold capital for liquidity risk. This study provides conclusions and recommendations on the regulatory treatment of liquidity risk in South Africa under Basel II. Although Pillar 2 reviews a variety of other risks and not only liquidity risk, it is proposed that the liquidity risk part of such reviews is conducted on the basis of a questionnaire used to determine possible gaps between banks' practices and prescribed criteria regarding the management and measurement of liquidity risk. It is important to note that such an approach has a constraint in terms of the substantial amount of work that would have to be done on the regulation of liquidity risk by both regulators and banks. Therefore resource constraints and the cost versus the benefit of such an approach would have to be considered carefully. The all-encompassing conclusion to this study is that capital would not be an effective mitigant for liquidity risk for a number of reasons. Liquidity risk differs from bank to bank and a general capital charge for all banks may not be sensible, therefore liquidity risk should be analysed on a bank-by-bank basis. In other words, capital could be charged for liquidity risk under Pillar 2(b) of Basel II. Such a capital charge would not serve the purpose of covering losses resulting from liquidity risk, but would instead impose a penalty on banks that are deemed to manage and measure liquidity risk imprudently. Such a penalty would typically be quite small but would serve as an incentive for banks to improve their management and measurement techniques to the desired level as set out by prescribed criteria. The criteria that should be used for determining whether banks measure and manage liquidity risk prudently should be of such a nature that the Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) complies with Basel Core Principle 14: Liquidity Risk in regulating liquidity risk. In addition, it should align the criteria used to the 14 Principles for the sound management of liquidity as prescribed by the Bank for International Settlements and the Institute of International Finance. Furthermore, it is proposed that the BSD should not prescribe to banks which methods to use to report their liquidity risk, because all banks are not the same in terms of size and sophistication. For this reason, banks should be allowed to follow an internal models approach for liquidity risk whereby banks are, subject to regulatory approval, allowed to use their own internal liquidity risk measures to report liquidity risk to the BSD. This approach is similar to the approach followed by the Bundesbank in Germany. A liquidity risk questionnaire could be drafted according to which banks' liquidity risk management and measurement is assessed in terms of the sound Principles for managing liquidity risk and the Basel Core Principles. One questionnaire could be used for the purposes of assessing the quality of banks' liquidity risk management and measurement in terms of a Supervisory Review and Evaluation Process (SREP) as well as for banks applying for approval of an internal models approach for liquidity risk. The same questionnaire could be used for both purposes, or the questionnaire could be divided into two clear sections whereby all banks are required to answer the SREP (or Pillar 2(b)) section, and only banks applying for the use of an internal models approach for liquidity risk are required to complete this section. A further conclusion to this study is that the BSD should publish a framework in which its approach to regulating liquidity risk is described in detail. Some aspects that should be included in such a document include a widely-accepted definition for liquidity risk and guidelines/minimum standards for measurement and management techniques for liquidity risk and the process that will be followed under Pillar 2 of Basel II. If the BSD is concerned about the level of potential liquidity risk in the South African banking system, it should consider having the additional instruments that are eligible as collateral included as instruments eligible for liquid asset reserve requirements. An additional mitigant for liquidity risk may be that the BSD requires banks to report their liquidity risk more frequently than the current monthly basis. / Thesis (M.Com. (Risk Management))--North-West University, Potchefstroom Campus, 2008.

A topical issue in financial economics is the development of appropriate stochastic dynamic models for banking items and behavior. The issue here is to fulfil the need to generalize the more traditional discrete-time models of banking activity to a Levy process setting. In this thesis, under the assumption that the loan market is imperfectly competitive, we investigate the evolution of banking items such as bank assets (cash, bonds, shares, Treasuries, reserves, loans and intangible assets), liabilities (demand deposits) and bank capital (bank equity, subordinate debt and loan loss reserves). Here we consider the influence of macroeconomic factors and profitability as well as its indicators return on assets (ROA) and return on equity (ROE). As far as bank assets are concerned, we note that loan pricing models usually reflect the financial funding cost, risk premium to compensate for the risk of default by the borrower, a premium reflecting market power exercised by the bank and the sensitivity of the cost of capital raised to changes in loans extended. On the other hand, loan losses can be associated with an offsetting expense called the loan loss provision (LLP), which is charged against Nett profit. This offset will reduce reported income but has no impact on taxes, although when the assets are finally written off, a tax-deductible expense is created. An important factor influencing loan loss provisioning is regulation and supervision. Measures of capital adequacy are generally calculated using the book values of assets and equity. The provisioning of loans and their associated write-offs will cause a decline in these capital adequacy measures, and may precipitate increased regulation by bank authorities. Greater level of regulation generally entail additional costs for the bank. Currently, this regulation mainly takes the form of the Basel II Capital Accord that has been implemented on the worldwide basis since 2008. It is clear that bank profitability is a major indicator of financial crises for households, companies and financial institutions. An example of this from the 2007-2008 subprime mortgage crisis (SMC) is the U.S. bank, Wachovia Corp., who reported a big loss as from the first quarter of 2007 and eventually was bought by the world's largest bank, Citigroup, on 29 September 2008. A further example from the SMC is that both the failure of the Lehman Brothers investment bank and the acquisition in September 2008 of Merrill Lynch and Bear Stearns by Bank of America and JP Morgan Chase, respectively, were preceded by a decrease in profitability and an increase in the price of loans and loan losses. The subprime mortgage crisis is characterized by contracted liquidity in the global credit markets and banking system. The level of liquidity in the banking sector affects the ability of banks to meet commitments as they become due without incurring substantial losses from liquidating less liquid assets. Liquidity, therefore, provides the defensive cash or near-cash resources to cover banks' liability. An undervaluation of real risk in the subprime market is cascading, rippling and ultimately severely adversely affecting the world economy. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects tumbled as the US housing market slumped. Banks worldwide are hoarding cash and showing a growing reluctance to lend, driving rates that institutions charge to each other on loans to record highs. Also, global money markets are inoperative, forcing increased injections of cash from central banks. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework. The stochastic dynamics of the aforementioned banking items assist in formulating a maximization problem that involves endogenous variables such as profit consumption, the value of the bank's investment in loans and provisions for loan losses as control variants. In particular, we demonstrate that the bank is able to maximize its expected utility of discounted profit consumption over a random time interval, [t,r], and terminal profit at time r. Here the term profit consumption refers to the consumption of the bank's profits by dividend payments on equity and interest and principal payments on subordinate debt. The associated Hamilton-Jacobi-Bellman (HJB) equation has a smooth solution when the optimal controls are computed by means of power, logarithmic and exponential utility functions. This enables us to make a direct comparison between the economic properties of the solutions for different choices of the utility function. In keeping with the main theme of this thesis, we simulate the financial indices ROE and ROA that are two measures of bank profitability. We further discuss optimization with power utility where we show the convergence of the Markov Chain Approximation Method (MCAM) and the impact of varying the model parameters in the form of loan loss severity, P, and loan loss frequency, <f>. We investigate the connections between the banking models and Basel II capital accord as well as the current subprime mortgage crises. As a way of conclusion, we provide remarks about the main issues discussed in the thesis and speculate about future research directions. The contents of this thesis is based on 3 peer-reviewed journal articles (see [105], [106] and [107]) and 1 peer-reviewed conference proceedings paper (see [104]). In addition, the paper [108] is currently being prepared for submission to an accredited journal. / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2009.