Basel-1,2,3, FRTB-CCAR. Basel 1,2,2.5 and 3

The slides talks about Basel norms and how they evolved .

1. BASEL NORMS -I, II, II.5 & III and FRTB and ERC
ThotaNagaraju
Deptof Econ & Fin
BITS-PilaniHydCampus
BASEL NORMS -I, II, II.5 & III and FRTB and ERC
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2. Reasons for Regulating Banks
•Its not possible to eliminate altogether the possibility of a bank failing.
•But governments can make the probability of default for any given bank very small.
•This is can be done by making the banks to keep enough capital for the risks they take.
By regulating banks, governments can
✓Create a stable economic environment where private individuals and businesses have confidence in the
banking system.
✓Avoid the systemic risk.
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3. BASEL-I
•Banks were regulated using balance sheet measures such as the ratio of capital to assets
•Definitions and required ratios varied from country to country
•Enforcement of regulations varied from country to country
•Bank leverage increased in 1980s
•Off-balance sheet derivatives trading increased
•Least Developed Countries' (LDCs) debt was a major problem
•Basel Committee on Bank Supervision set up (1974; Belgium, Canada, France, Germany, Italy, Japan, Luxemburg,
Netherlands, Sweden, Switzerland, UK and USA).
•Under the patronage of Bank for International Settlements (BIS), the first meeting results led a
document “International Convergence of Capital Measurements and Capital Standards”.
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Pre-1988

4. BASEL-I, 1988: BIS Accord (Cooke Ratio)
FollowingcommentsonaconsultativepaperpublishedinDecember1987,acapitalmeasurement
systemcommonlyreferredtoastheBaselCapitalAccordwasapprovedbytheG10Governors
andreleasedtobanksinJuly1988.
The 1988 Accord called for
1. Capital must be 8% of risk weighted amount.
2. At least 50% of capital must be Tier 1
•Tier 1 Capital: common equity, non-cumulative perpetual preferred shares
•Tier 2 Capital:cumulative preferred stock, certain types of 99-year debentures, subordinated
debt with an original life of more than 5 years
Tier 1 capital refers to capital of more permanent nature. It should make up at least 50% of the bank’s total capital base.
Tier 2 capital is temporary or fluctuating in nature.
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Types of Capital
Bank Asset Classification System

5. BASEL-I, 1988: BIS Accord (Cooke Ratio) –Numerical example
For example,
Let’s say a bank has a cash reserve of $200, $50 as a home mortgage, and $100 as
loans given out to different companies.
The risk-weighted assets as per the set norms will be as follows: –
= ($200*0) +($50*0.5) +($100*1)
= 0+25+100
= $125.
Therefore, according to Basel I, this bank has to maintain a minimum of 8% of $125
as a minimum capital (and at least 4% in tier 1 capital).
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6. Benefits & Limitations of Basel -I
Benefits
•Significant increase in Capital Adequacy Ratios of internationally active banks
•Competitive equality among internationally active banks
•Augmented management of capital
•A benchmark for financial evaluation for users of financial information
Limitations
•Other kinds of risk, such as market risk, operational risk, liquidity risk, etc. were not taken
into consideration.
•Emphasis is put on the book values of assets rather than the market values.
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7. Basel -II
•The 1988 Basel Accord improved the way capital requirements were determined, but it does have
significant weaknesses.
•Under the Accord, all loans by a bank to a corporation have a risk weight of 100% and require the same
amount of capital. A loan to a corporation with a AAA credit rating is treated in the same way as one to a
corporation with a B credit rating.
•Also, in Basel I there was no model of default correlation.
•In June 1999, the Basel Committee proposed new rules that have become known as Basel II.
•It is an extension of the regulations for minimum capital requirements as defined under Basel I. The
Basel II framework operates under three pillars:
I.Capital adequacy requirements
II.Supervisory review
III.Market discipline
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8. Three Pillars under Basel -II
Pillar 1: Capital Adequacy Requirements
•Pillar 1 improves on the policies of Basel I by taking into consideration operational risks in
addition to credit risks associated with risk-weighted assets (RWA).
•It requires banks to maintain a minimum capital adequacy requirement of 8% of its RWA.
•Basel II also provides banks with more informed approaches to calculate capital requirements
based on credit risk, while taking into account each type of asset’s risk profile and specific
characteristics.
The two main approaches include the:
1. Standardized approach (SA)
2. Internal ratings-based approach (IRBA)
2.1 Foundation Internal Ratings-based approach (FIRB)
Banks can use their own assessments of parameters such as the Probability of Default, while the assessment methods of other parameters, mainly risk
components such as Loss Given Default and Exposure at Default, are determined by the supervisor.
2.2. Advanced Internal Ratings-based approach (AIRB):
Banks can use their own assessments for all risk components and other parameters.
Total Capital = 0.08 ×(credit risk RWA + market risk RWA + operational risk RWA)
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9. New Capital Requirements –SA and IRBA
Standardized Approach
➢Bank and corporations treated similarly (unlike Basel I)
Internal ratings-based approach
Basel II provides a formula for translating PD (probability of default), LGD (loss given
default), EAD (exposure at default), and M (effective maturity) into a risk weight
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10. USA vs European Implementation
➢Basel II to be implemented from 2007 onwards.
➢In US Basel II applies only to large international banks
➢Small regional banks required to implement “Basel 1A’’ (similar to Basel I), rather than Basel II
➢European Union requires Basel II to be implemented by securities companies as well as all
banks
India
➢A two-stage implementation of the guidelines is envisaged to provide adequate lead time to the
banking system.
➢Accordingly, the foreign banks operating in India and the Indian banks having operational
presence outside India are required to migrate to the Standardized Approach with effect from
March 31, 2008.
➢All other Scheduled commercial banks are encouraged to migrate to these approaches under
Basel II in alignment with them, but, in any case, not later than March 31, 2009.
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11. Three Pillars under Basel -II
Pillar 2: Supervisory Review
➢Pillar 2 of Basel II is concerned with the supervisory review process.
➢Four key principles of supervisory review are specified:
1.Banksshouldhaveaprocessforassessingtheiroverallcapitaladequacyinrelationtotheir
riskprofileandastrategyformaintainingtheircapitallevels.
2.Supervisorsshouldreviewandevaluatebanks’internalcapitaladequacyassessmentsand
strategies,aswellastheirabilitytomonitorandensurecompliancewithregulatorycapital
ratios.Supervisorsshouldtakeappropriatesupervisoryactioniftheyarenotsatisfiedwiththe
resultofthisprocess.
3.Supervisorsshouldexpectbankstooperateabovetheminimumregulatorycapitaland
shouldhavetheabilitytorequirebankstoholdcapitalinexcessofthisminimum.
4.Supervisorsshouldseektointerveneatanearlystagetopreventcapitalfromfallingbelow
theminimumlevelsrequiredtosupporttheriskcharacteristicsofaparticularbankandshould
requirerapidremedialactionifcapitalisnotmaintainedorrestored.
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12. Three Pillars under Basel -II
Pillar 3: Market Discipline
➢Pillar 3 of Basel II is concerned with increasing the disclosure by a bank of its risk
assessment procedures and capital adequacy.
➢Regulatory disclosures are likely to be different in form from accounting disclosures and
need not be made in annual reports.
➢It is largely left to the bank to choose disclosures that are material and relevant. Among
the items that banks should disclose are:
1. The entities in the banking group to which Basel II is applied and adjustments made for entities to
which it is not applied.
2. The terms and conditions of the main features of all capital instruments.
3. A list of the instruments constituting Tier 1 capital and the amount of capital provided by each item.
4. The total amount of Tier 2 capital.
5. Capital requirements for credit, market, and operational risk.
6. Other general information on the risks to which a bank is exposed and the assessment methods used
by the bank for different categories of risk.
7. The structure of the risk management function and how it operates.
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13. Basel II.5
➢It was perhaps unfortunate for Basel II that its implementation date coincided, at
least approximately, with the start of the worst crisis that financial markets had
experienced since the 1930s.
➢Some commentators have blamed Basel II for the crisis.
➢They point out that it was a move toward self-regulation where banks, when
calculating regulatory capital, had the freedom to use their own estimates of model
inputs.
➢However, blaming Basel II may be unfair because, the seeds of the crisis were
sown well before Basel II was implemented.
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14. Basel II.5
➢This is a collection of changes to the calculation of market risk capital that was
put in place by the Basel Committee on Banking Supervision following the large
losses experienced by banks during the crisis.
➢The implementation date for Basel II.5 was December 31, 2011.
➢During the credit crisis, it was recognized that some changes were necessary to
the calculation of capital for market risk.
➢There are three changes involving:
1. The calculation of a stressed VaR;
2. A new incremental risk charge; and
3. A comprehensive risk measure for instruments dependent on credit correlation.
➢The measures have the effect of greatly increasing the market risk capital that
large banks are required to hold.
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15. Stressed VaR
➢Stressed VaRis determined by basing calculations on how market variables moved during a 250-day (12-month)
period of stressed market conditions, rather than on how they moved during the past one to four years.
➢The historical simulation calculations to arrive at a stressed VaRmeasure assume that the changes in market
variables during the next day are a random sample from their daily changes observed during the 250-day period of
stressed market conditions.
➢Basel II.5 requires banks to calculate two VaRs.One is the usual VaR(based on the previous one to four years of
market movements).
➢The other is the stressed VaR(calculated from a stressed period of 250 days). The two VaRmeasures are combined
to calculate a total capital charge.
The formula for the total capital charge is
➢where VaR
t−1 and sVaR
t−1 are the VaRand stressed VaR(with a 10-day time horizon and a 99% confidence level)
calculated on the previous day.
➢The variables VaR
avgand sVaR
avgare the average of VaRand stressed VaR(again with a 10-day time horizon and a
99% confidence level) calculated over the previous 60 days.
➢The parameters m
sand m
care multiplicative factors that are determined by bank supervisors and are at minimum
equal to three.
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16. Incremental Risk Charge
•In2005,theBaselCommitteebecameconcernedthatexposuresinthetradingbookwere
attractinglesscapitalthansimilarexposuresinthebankingbook.Regulatorsproposedan
incrementaldefaultriskcharge(IDRC)in2005thatwouldbecalculatedwitha99.9%
confidencelevelandaone-yeartimehorizonforinstrumentsinthetradingbookthatwere
sensitivetodefaultrisk.
•Theeffectofthiswouldhavebeenthatthecapitalrequirementfortheseinstrumentsequalled
themaximumofthecapitalusingtradingbookcalculationsandthecapitalusingbankingbook
calculations.
•In2008,theBaselCommitteerecognizedthatmostofthelossesinthecreditmarketturmoilof
2007and2008werefromchangesincreditratings,wideningofcreditspreads,andlossof
liquidity,ratherthansolelyasaresultofdefaults.Itthereforeamendeditspreviousproposalsto
reflectthisandtheIDRCbecametheincrementalriskcharge(IRC).
•TheIRCrequiresbankstocalculateaone-year99.9%VaRforlossesfromcreditsensitive
productsinthetradingbooktakingbothcreditratingchangesanddefaultsintoaccount.
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17. Basel -III
➢Following the 2007–2009 credit crisis, the Basel Committee realized that a major overhaul of Basel II was
necessary.
➢Basel II.5 increased capital requirements for market risk. The Basel Committee wanted to increase equity
capital requirements further.
➢In addition, it considered that the definition of equity capital needed to be tightened and that regulations were
needed to address liquidity risk.
➢There are six parts to the regulations:
1. Capital Definition and Requirements
2. Capital Conservation Buffer
3. Countercyclical Buffer
4. Leverage Ratio
5. Liquidity Risk
6. Counterparty Credit Risk
➢The regulations are being implemented gradually between 2013 and 2019.
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18. Basel –III : Capital Definition and Requirements
Under Basel III, a bank’s total capital consists of:
1. Tier 1 equity capital
2. Additional Tier 1 capital
3. Tier 2 capital
➢Tier 1 equity capital (also referred to as common equity Tier 1, or CET1, capital) includes share
capital and retained earnings but does not include goodwill or deferred tax assets.
➢The additional Tier 1 (AT1) capital category consists of items, such as noncumulative preferred
stock, that were previously Tier 1 but are not common equity.
➢Tier 2 capital includes debt that is subordinated to depositors with an original maturity of five
years.
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19. Basel –III : Capital Requirements
1.Tier 1 equity capital must be at least 4.5% of risk-weighted assets at all times.
2. Total Tier 1 capital (Tier 1 equity capital plus additional Tier 1 capital) must be at
6% of risk-weighted assets at all times.
3. Total capital (total Tier 1 plus Tier 2) must be at least 8% of risk-weighted assets
at all times.
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20. Basel –III : Capital Conservation Buffer
➢Inadditiontothecapitalrequirementsjustmentioned,BaselIIIrequiresacapital
conservationbufferinnormaltimesconsistingofafurtheramountofCET1
capitalequalto2.5%ofrisk-weightedassets.
➢Thisprovisionisdesignedtoensurethatbanksbuildupcapitalduringnormal
timessothatitcanberundownwhenlossesareincurredduringperiodsof
financialdifficulties.(Theargumentinfavourofthisisthatitismucheasierfor
bankstoraisecapitalduringnormaltimesthanduringperiodsofstressedmarket
conditions.)
➢ThecapitalconservationbufferrequirementisbeingphasedinbetweenJanuary1,
2016,andJanuary1,2019.
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21. Basel –III : Countercyclical Buffer
•Inadditiontothecapitalconservationbuffer,BaselIIIhasspecifiedacountercyclicalbuffer.
Countercyclicalcapitalbufferisdesignedtoensurethatthebankingsystemhasabufferof
capitaltoprotectitagainstfuturepotentiallosseswhenexcessaggregatecreditgrowthisjudged
tobeassociatedwithabuild-upofsystem-widerisk.
•Thisissimilartothecapitalconservationbuffer,buttheextenttowhichitisimplementedina
particularcountryislefttothediscretionofnationalauthorities.
•Thebufferisintendedtoprovideprotectionforthecyclicalityofbankearnings.Thebuffercan
besettobetween0%and2.5%oftotalrisk-weightedassetsandmustbemetwithTier1equity
capital.
•Likethecapitalconservationbuffer,thecountercyclicalbufferrequirementswillbephasedin
betweenJanuary1,2016,andJanuary1,2019.
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22. Basel –III : Leverage Ratio
•The leverage ratio is the ratio of a capital measure to an exposure measure. The
capital measure is total Tier 1 capital.
•In addition to the capital requirements based on risk-weighted assets, Basel III
specifies a minimum leverage ratio of 3%.
•The exposure measure is the sum of
(a) on-balance-sheet exposures,
(b) derivatives exposures,
(c) securities financing transaction exposures, and
(d) off-balance-sheet items.
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23. Basel –III : Liquidity Risk
➢Prior to the crisis, the focus of the Basel regulations had been on ensuring that banks had
sufficient capital for the risks they were taking.
➢It turned out that many of the problems encountered by financial institutions during the crisis
were not as a result of a shortage of capital.
➢They were instead a result of liquidity risks taken by the banks.
➢Liquidity risks arise because there is a tendency for banks to finance long-term needs with
short-term funding, such as commercial paper.
➢Basel III has introduced requirements involving two liquidity ratios that are designed to ensure
that banks can survive liquidity pressures.
The ratios are:
1. Liquidity Coverage Ratio (LCR); and
2. Net Stable Funding Ratio (NSFR)
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24. Basel –III : Liquidity Risk, LCR
➢The LCR focuses on a bank’s ability to survive a 30-day period of liquidity
disruptions. It is defined as:
High−QualityLiquidAssets
NetCashOutflowsina30−DayPeriod
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25. Basel –III : Liquidity Risk, NSFR
➢The NSFR focuses on liquidity management over a period of one year. It is defined as
AmountofStableFunding
RequiredAmountofStableFunding
The numerator is calculated by multiplying each category of funding (capital, wholesale deposits,
retail deposits, etc.) by an available stable funding (ASF) factor, reflecting their stability.
Basel III requires the NSFR to be greater than 100% so that the calculated amount of stable
funding is greater than the calculated required amount of stable funding.
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26. Basel –III : Liquidity Risk, NSFR–Numerical Example
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27. Basel –III : Counterparty Credit Risk
➢For each of its derivatives counterparties, a bank calculates a quantity known as the credit value
adjustment (CVA).
➢This is the expected loss because of the possibility of a default by the counterparty.
➢Reported profit is reduced by the total of the CVAs for all counterparties.
➢The CVA for a counterparty can change because either
(a) the risk factors underlying the value of the derivatives entered into with the counterparty change or
(b) the credit spreads applicable to the counterparty’s borrowing change.
➢Major objective was to allow banks that hedged the impact of both credit spread changes and
risk factor changes on CVA to take both into account when calculating regulatory capital.
➢Without this change, hedges for risk factor changes would increase capital charges.
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28. G-SIBs, SIFIs, and D-SIBs
•Regulators are particularly concerned that large, systemically important financial institutions
keep sufficient capital to avoid a repeat of the government bailouts during the 2007 to 2009
credit crisis.
•The term G-SIB stands for global systemically important bank, whereas the term SIFI
(systemically important financial institution) is used to describe both banks and nonbanks that
are considered to be systemically important. The popular view of SIFIs is that they are “too big
to fail,” and have been identified as the financial institutions that will have to be bailed out if
they run into financial difficulties.
•The systemic importance of a bank or other financial institution depends on the effect that its
failure could have on the global financial system. This in turn depends on the nature of its
activities and the contracts it has entered into with other financial institutions globally. The
Basel Committee uses a scoring methodology to determine which banks are G-SIBs. Other
approaches involving network theory have been attempted by some researchers.
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29. Trading Book vs. Banking Book
•The FRTB addresses whether instruments should be put in the trading book or the banking book.
•Roughly speaking, the trading book consists of instruments that the bank intends to trade.
•The banking book consists of instruments that are expected to be held to maturity.
•Instruments in the banking book are subject to credit risk capital whereas those in the trading book are
subject to market risk capital.
•The two sorts of capital are calculated in quite different ways.
•This has in the past given rise to regulatory arbitrage.
•For example, banks have often chosen to hold credit-dependent instruments in the trading book because
they are then subject to less regulatory capital than they would be if they had been placed in the banking
book.
•The FRTB attempts to make the distinction between the trading book and the banking book clearer and
less subjective.
•To be in the trading book, it will no longer be sufficient for a bank to have an “intent to trade.” It must be
able to trade and manage the underlying risks on a trading desk.
•The day-to-day changes in value should affect equity and pose risks to solvency.
•The FRTB provides rules for determining for different types of instruments whether they should be
placed in the trading book or the banking book.
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30. Fundamental Review of the Trading Book (FRTB)
➢In May 2012, the Basel Committee on Banking Supervision issued a consultative
document proposing major revisions to the way regulatory capital for market risk
is calculated. This is referred to as the “Fundamental Review of the Trading Book”
(FRTB).
➢The Basel I calculations of market risk capital were based on a value at risk (VaR)
calculated for a 10-day horizon with a 99% confidence level.
➢The VaRwas “current” in the sense that calculations made on a particular day
were based on the behaviorof market variables during an immediately preceding
period of time (typically, one to four years). Basel II.5 required banks to calculate
a “stressed VaR” measure in addition to the current measure.
➢FRTB changes the measure used for determining market risk capital. Instead of
VaRwith a 99% confidence level, it uses expected shortfall (ES) with a 97.5%
confidence level. The measure is actually stressed ES with a 97.5% confidence.
This means that, as in the case of stressed VaR, calculations are based on the way
market variables have been observed to move during stressed market conditions.
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31. Fundamental Review of the Trading Book (FRTB)
•UnderFRTB,the10-daytimehorizonusedinBaselIandBaselII.5ischangedtoreflecttheliquidityofthemarketvariablebeingconsidered.
•FRTBconsiderschangestomarketvariablesthatwouldtakeplace(instressedmarketconditions)overperiodsoftimereflectingtheirliquidity.
•Thechangesarereferredtoasshocks.
•Themarketvariablesarereferredtoasriskfactors.
•Theperiodsoftimeconsideredarereferredtoasliquidityhorizons.
•Fivedifferentliquidityhorizonsarespecified:10days,20days,40days,60days,and120days.
•The allocation of risk factors to these liquidity horizons is indicated in the below table.
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Risk Factor Horizon (days)
Interest rate (dependent on currency) 10–60
Interest rate volatility 60
Credit spread: sovereign, investment grade 20
Credit spread: sovereign, non-investment grade 40
Credit spread: corporate, investment grade 40
Credit spread: corporate, non-investment grade 60
Credit spread: other 120
Credit spread volatility 120
Equity price: large cap 10
Equity price: small cap 20
Equity price: large cap volatility 20
Equity price: small cap volatility 60
Equity: other 60
Foreign exchange rate (dependent on currency) 10--40
Foreign exchange volatility 40
Energy price 20
Precious metal price 20
Other commodities price 60
Energy price volatility 60
Precious metal volatility 60
Other commodities price volatility 120
Commodity (other) 120

32. Regulatory Landscape -Comprehensive Capital Analysis and Review
•The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve
to assess whether the largest bank holding companies operating in the United States have sufficient
capital to continue operations throughout times of economic and financial stress and that they have
robust, forward-looking capital-planning processes that account for their unique risks.
Current Regulatory Landscape and Impact
•Regulatory bodies have responded to recent financial crises by mandating higher and continuously
evolving standards that impact the operating models of financial institutions.
•The Regulations:The Federal Reserve Board (FRB) reoriented its supervisory program in response to
lessons learnt from the 2008-09 financial crisis to promote a safe, sound, and stable banking and
financial system. One of the key FRB regulations mandated is the Comprehensive Capital Analysis and
Review (CCAR). In CCAR, the FRB reviews covered companies’ capital plans and planning processes
under various base and stress economic scenarios.
•The impact: In response to the regulations imposed by the FRB, covered companies are required to
strengthen capital planning processes and maintain sufficient capital to absorb losses during stressful
conditions, meet obligations to creditors and counterparties and continue to serve as credit
intermediaries. The FRB’s macro-prudential goals have been pursued with more direct supervisory
access and engagement across banking organizations, especially with executive management and the
Board of Directors.
•Organizational changes:The shift in organizational operating models is requiring companies to
establish more robust governance and control structures, upgrade data management infrastructure, and
streamline processes, roles and responsibilities.
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33. What is Comprehensive Capital Analysis and Review (CCAR)?
•CCAR is used by U.S. regulators to oversee covered companies’ capital adequacy, capital
distribution and capital planning processes under various base and stress economic scenarios
•The exercise requires an integrated capital planning process with clearly defined and
documented roles and responsibilities, accountability and linkage across strategic planning, risk
management, financial planning, treasury, acquisition planning and the lines of business
•CCAR results are presented in a comprehensive annual capital plan with four components:
•Capital Policy
•Capital Adequacy
•Capital Planning Process and Supporting Documentation
•Business Plan Changes
•Unlike other regulatory activities that are viewed as purely compliance-related, CCAR impacts
all aspects of our business and therefore requires cross-functional collaboration.
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34. CCAR Principles
The FRB has articulated 7 principles corresponding to supervisory expectations for a capital adequacy process (CAP).
➢Risk Identification and Management
Requires sound risk measurement and management infrastructure that supports the identification, measurement, assessment, and control of all material
risks.
➢Loss Estimation
Implementation of effective methodologies for translating risk measures into estimates of potential losses over a range of scenarios is essential.
➢Capital Resource Estimation
A clear definition of available capital resources is required, followed by an effective process for estimating those capital resources (including projected
revenues) over a range of scenarios.
➢Capital Adequacy Assessment
Involves processes for bringing together loss estimates and capital resources to assess the combined impact on capital adequacy in relation to stated goals
for the level and composition of capital.
➢Capital Policy and Planning
Emplacing comprehensive capital policy and capital planning practices are crucial to establishing capital goals, determining appropriate composition and
levels of capital, making decisions about capital actions, and maintaining capital contingency plans.
➢Internal Controls
Robust internal controls governing capital adequacy process components, including policies and procedures; change control; modelvalidation and
independent review; comprehensive documentation; and review by internal audit.
➢Board and Senior Management Oversight
Effective board and senior management oversight of all components of CAP is critical, including periodic review of risk infrastructure, loss and resource
estimation methodologies; capital goals; severity of scenarios; limitations/uncertainties in CAP; and approval of capital decisions.
Thota Nagaraju BITS-Pilani Hyderabad Campus BASEL-I, II, & III, FRTB and ERC Summer Term 2023-24 34

35. How does CCAR impact the bank?
Enhanced Risk Management Practices
•Identification, measurement, mitigation and documentation of key business risks will be held to
a higher standard, as this forms the backbone of scenarios.
Front to Back Collaboration, Data Consistency & Automation
•More streamlined and automated processes between functions, as well as data integrity across
Risk and Finance, will be required in order to meet both quantitative and qualitative submission
requirements.
Increased Focus on Control Environment
•Tighter controls and governance needs to be adopted across Front Office, Finance, Risk, Ops
processes (e.g. P&L review and challenge, Back Testing, New Business and Approval Process).
Heightened Scrutiny on Documentation
•All policies, processes, assumptions, judgments, review and challenge and important decisions
need to be documented and be ready for attestation.
Thota Nagaraju BITS-Pilani Hyderabad Campus BASEL-I, II, & III, FRTB and ERC Summer Term 2023-24 35

36. Regulatory landscape and the future of risk management: Economic Risk Capital (ERC)
➢.
Thota Nagaraju BITS-Pilani Hyderabad Campus BASEL-I, II, & III, FRTB and ERC Summer Term 2023-24 36
ERC –Overview

37. Defining ERC –Current Framework
➢…
Thota Nagaraju BITS-Pilani Hyderabad Campus BASEL-I, II, & III, FRTB and ERC Summer Term 2023-24 37

38. Why is Economic Risk Capital Important?
➢…
Thota Nagaraju BITS-Pilani Hyderabad Campus BASEL-I, II, & III, FRTB and ERC Summer Term 2023-24 38