Credit Risk Charge > OPE Risk Charge > Mkt Risk Charge

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Hi David,

From the past year question, the following concept is always tested:
Capital allocation to credit risk is always greater than capital allocation to operation risk which in turn greater than the capital allocation to market risk.

The capital charge required by these risks are calculated by the formula specific to these risks. They all subject to a minimum of 8% risk capital requirement. Which parameter in the formula of these risks makes the amount of capital allocation amongst these risk differs?

* I think capital allocation to market risk is scaled down due to the bank needs to provide capital for 10 days.

Your advice, please.

Regards
Learning

 

[David Harper CFA FRM]

Hi Learning,

I don't (frankly) think the question is instructive. In regard to, "Which parameter in the formula of these risks makes the amount of capital allocation amongst these risk differs?" what answer is given because I perceive no glib answer ...

at the advanced (internal) levels the VaR calibration is:

* Credit VaR (IRB) & OpRisk VaR: 99.9% confidence & 1 year holding period
* Market risk VaR (IMA): 99% and 10-day holding period

i.e., you can see why we aren't surprised MRC < ORC < CRC, but i don't think this is mathematically necessary...or helpful...in regard to MRC, the addition of the stressed VaR will greatly increase MRC
...the outcome CRC > ORC > MRC is not surprising: basel I started with CRC, most FI have sign credit exposure. Basel II expects a lower CRC due to more granular measure, and (in part) introduced the ORC to make explicit the ORC (which had been implicit in the Basel I CRC). In a loose way, they expected lower CRC to be offset partly by the new ORC.

David

 

[frm_daniel]

Hi David,

The question is about the Stress VAR measure. The capital requirement is calculated according to the formula of c = Max (var(t-1), mc* var(avg)) + max (sVar(t+1), ms*sVar(average)). My understanding is to observe the historical 12 months data, select the period of stress's risk factors relevant to the "current" portfolio, apply to the "current" portfolio and calcuate the stress var.
1. However, how do we come up with 60 days (at least ) of sVaR average.
2. Also I saw some reference takes sVaR (t+1) as sVaR (t-1).

Regards,
Daniel