Basel i ii

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Basel II - questions and answers.

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Basel i ii

  1. 1. Problems inhibited in Basel Ι • Bank’s revenue earning tendency encourages lending to lower-quality borrowers • Higher Interest rates inhibits Credit risk within Portfolio • Cost-based pricings are not normally considered • Lead to inorganic Asset growth • While earning retention (organic capital growth) has been slowWhy Balance Sheet Management? • Limited Capital: Capital is risk adjusted, Widely Covered, Capital Raising barrier • Less Balance Sheet Expansion: Expansion needs proportional capital support (90:10) • Rationed Portfolio Lending: Early, any where you can invest because single risk weight fit for all • Loan/Investment pricing to profitability: Economic Profit • Allocation of capital to support business: Generally 10 times, however, through allocation it can be up to 50 times • Credit Risk Transfer: Introduction of Innovative products, Securitized LendingMeasuring Bank Profitability  Return on Equity: Post Financial Year Vs. Pre-financial year. Hence, ROE is at targeted level  Set by board of directors for bank management  Thereby derives budgeting for cost of and allocation of capital Risk Adjusted Return on Capital (RAROC):  Broadly speaking, in business enterprises, risk is traded off against benefit.  Co-relation between risk and return  Economic Profit “EP” (Economic Value Added):  Return/value addition after considering its cost