CRM : Collateral basic question on Haircut concept

[dthigale]

Hi David,

1. Could you please elaborate a little bit on the 'Haircut' concept? It would be helpful for me to
understand e calculations on the worksheet 7.d.4. (page 22)

2. Also I have another basic question on the K multiplier equation (page 17 in 7.d)

K = LGD x f (PD) x f (M,b).

What is the parameter b in the above function?

3. The ASRF Model formula seems very complicated / time consuming so as the worksheet. Is it safe to skip it for the moment?

Regards.

D.

 

[David Harper CFA FRM]

Hi Dinesh,

1. In this interest of time, can i refer to this practice question from last year: http://forum.bionicturtle.com/viewthread/560/
(I debated whether to incl. Basel II collateral b/c it's timely yet, strangely, makes no appearance in the AIMs)

2. This formula is from the assigned de Servigny. It is symbolic, but, I am starting to think, more distracting than helpful...
please see: http://forum.bionicturtle.com/viewreply/3722/
i.e., f(M,b) refers to the maturity adjustment which has an intuitive component (longer maturity increases the capital charge) and the un-intuitive component (the maturity adjustment is actually impacted by PD, too!?). So b is the function that makes something out of the PD. Namely, increases the maturity adjustment for lower PDs.
If you like, the IRB is here: http://forum.bionicturtle.com/viewreply/3722/
and cell 15 contains the maturity adjustment; b() is essentially the bulk of that adjustment

3. Agreed. I definitely think a deep dive is not required; I think it's possible (given the breadth) that it won't be queried.
Here is what I told asja that i think is important: http://forum.bionicturtle.com/viewreply/4031/

...in short, the following:

Conditional EL - EL = UL is the basis for the capital charge
(Conditional EL = conditonal PD * downturn LGD; i.e., the EL is “transformed” into a “worser case” EL in order to achieve a UL)

so the Conditional EL is the key calculation and depends on, in addition to PD, (see the two terms):
1. 99.9% confidence
2. asset correlation (rho) to the “single systemic risk factor”; i.e., higher correlation = higher CEL = higher risk charge
if you look at CEL above, rho is weighting the relative importance of 99.9% and asset PD

What I do recommend is reading the excellently dense paper on IRB (mostly for the qualitative front-end; as a practical matter, the deep dive and later in paper won't matter). I attached it.

David

 

[dthigale]

Hi David,

Thanks for the detailed reply and for directing me to the discussion on the Forum regarding the Capital Requirement.

So the Haircut of 6 % (add in the liability and reduce from the securitization: cuts at both ends) is a standard percentage? Is there any reason that it is 6 %?

Also we have not used the scaling factor of 1.06 (Here again the 6 % (?)) in the problems we solved for capital requirement.
Do we add the scaling factor while solving th eproblem in the exam or just come up with two answers and match with the best choice?

I am planning to go thru the "Explanatory Note" (seems may have some queries for you.

** In the Schermann paper under financial risk does 'Asset / Liability' Risk is the Liquidity Risk? I presumed so becuase Liquidity Risk is not in the chart.

** Could you please point me to some reading that explains trading book and banking book classification? Especially if there are new regulations for option / derivative trading.

Regards.

D.