Basel II Credit Risk (Standardized Approach): RWA & CRM

[mikey10011]

On slide 26 on Credit Assessments: Standardized Approach could you give concrete examples of "Banks-Option 1," "Banks Options 2" and "Banks-Short-term claims under Option 2" are [paragraph 63]? Also why does a risk-weight of *150%* makes sense for credit assessments "Below B-"? (Wouldn’t EAD be a total writeoff with LGD = 100%?) Also does E [slide 51] mean “exposure at default” (EAD) [cf. Annex 7 (pp. 298-301)]? Does RWA = E* x risk weight [in slides 27 & 28]?

On slide 52 on risk-weighted assets for asset securitization, could you give a concrete example of what "Deduction" means in the tables [paragraphs 567 & 561]?

I know that you have talked about this before
http://forum.bionicturtle.com/viewthread/410/
http://forum.bionicturtle.com/viewthread/23/
but I still don’t understand credit risk mitigation (CRM) [slide 51] under the standardized approach.

Is there any chance that you could put together a screencast of an EditGrid spreadsheet with multiple tabs corresponding to multiple concrete examples with different scenarios of collateral (C) and haircuts (He, Hc, Hfx) linking exposure-at-default (EAD), credit assessment [slide 26], simple & comprehensive CRM [slide 51], and RWA capital requirements [slide 21]? Who determines and quantified the “appropriate” haircut [paragraph 147] and what are some typically real-life numbers?

Finally, the Basel II framework was published on June 2006. Can you recommend some “textbooks” or tutorial articles that have been published since then that go through the document? (I’ve looked through our FRM books and they were all published before June 2006.)

 

[David Harper CFA FRM]

Mikey,

Before I answer in full (which i will), please note quickly: this episode question contains a spreadsheet that illustrates three scenarios for the treatment of collateral. I *think* this will help with *many* of your questions. Notice it contains a SIMPLE and a COMPREHENSIVE, both of which are treated under STANDARD approach to CREDIT.

Yes, I will happily expound on this XLS, but i wanted to point you to the current version first. (The haircuts are in the Basel document, so in my XLS examples, I am using haircuts from Basel II, which are [similar to the RWA lookup table] a lookup value based on collateral type and rating. They run from 0% [no haircut for cash] up to 25%)

"Can you recommend some “textbooks” or tutorial articles"
Last November I wrote this 14-part summary of Basel II. I have purchased some Basel books (e.g., Basel II risk parameters), but the ones i've bought are stunningly technical. I have not found better a better intro than Jorion gives in the FRM Handbook. I would love to *source* a good intro resource on Basel II collateral & especially securitization (I've not seen anything on this?!); so, sorry i don't but please do share if you find something good

David

 

[mikey10011]

I took a look at your episode question ... and cool! That was perfect!!!
(You don't have to create an XLS but would appreciate answers to my nitnoid questions.)

OMG! I didn't even know about the "2008 FRM Screencast Tutorial Q&A;" folder.
(Right now I am going through my "first pass" in studying for the FRM exam and didn't think of looking there. As you can see above I did find your other two CRM-related postings)

As a suggestion for next year, your forum (and EditGrid spreadsheets and screencast vignettes) should be organized or indexed around episode slide numbers. Your clients are now blessed with a *content rich* site and they should take advantage of that. Thank you!!!

 

[David Harper CFA FRM]

Mikey,

Each episode has a link to an associated newsletter. And each newsletter contains practice questions that point to the Q&A;. For example,
http://www.bionicturtle.com/learn/screencast/2008_episode_14_investment_b_part_1/
Please note there is a link "Here is the associated tips newsletter" which goes to the key tips and the Episode Q&A;question folder to which you refer. That link is supposed to be the entry to these episode-specific Q&A;...

...but nevertheless, thank you for your feedback, I agree we need to make the organization tighter and we are already started on that for next year...thanks again!

David