IRB Bank: Parameters set by Supervisor

[[email protected]]

Hi David,

Past year questions tested the following findings.
1- IRB bank definitely can use its own estimate for PD regardless whether they are FIRB or AIRB.
2- correlation coefficient is set by Supervisor regardless whether they are FIRB or AIRB

Slide 19 - Operational & Integrated Risk Mgt 7.d
AIRB Bank can use internal estimates for PD, EAD, LGD and M

Query:
Beside correlation coefficient, what other parameters are set by the Supervisor regardless whether the bank is FIRB or AIRB? Your advice, please.

Regards
Learning

 

[David Harper CFA FRM]

Hi Learning:

Your (1) and (2) are good to know. Agreed, commonly tested!

the only params are PD, LGD, EAD, M, and correlation (and theoretically, "granularity" to address concentration)
FIRB: bank only sets PD; all other supervisor
AIRB: bank sets PD, LGD, EAD, M

So supervisor always controls (1) correlation and (2) granularity (per ASRF: assumed infinite a la portfolio invariance)
or, what this mean is: they are currently HARD-WIRED into Basel II but the supervisor per PILLAR TWO can override

David

 

[[email protected]]

Hi David,

Confidence level is also hard-wired into the risk weight function----right?

Can you explain further on "scaling factor" of slide 65 - Operational & Integrated Risk Mgt 7.d? Thanks.

Regards
Learning.

 

[David Harper CFA FRM]

Hi Learning,

Yes, at the advanced levels (IRB for CRC, IMA for MRC, AMA for ORC), the VaR confidence is essentially hardwired: 99.9% one-year for credit & ops; 99% ten-day for market risk.

The scaling factor is a multiplier that basel (BIS committee) applies apparently to adjust the total capital in the system (out of concern, i think, that moving to advanced might bring system-wide capital levels too low. So it is a sort of override to control the aggregate capital implication of the IRB.

From Basel II para 14:

"The Committee believes it is important to reiterate its objectives regarding the overall level of minimum capital requirements. These are to broadly maintain the aggregate level of such requirements, while also providing incentives to adopt the more advanced risk-sensitive approaches of the revised Framework. To attain the objective, the Committee applies a scaling factor to the risk-weighted asset amounts for credit risk under the IRB approach. The current best estimate of the scaling factor using quantitative impact study data is 1.06. National authorities will continue to monitor capital requirements during the implementation period of the revised Framework. Moreover, the Committee will monitor national experiences with the revised Framework"

44. "...:The Committee applies a scaling factor in order to broadly maintain the aggregate level of minimum capital requirements"

David

 

[ajsa]

Hi David,

just to double check, Is the scaling factor for IRB only or for the total risk capital? I am asking because I remeber you said it applies to the total:
http://forum.bionicturtle.com/viewthread/1841/#3722

Thanks.

 

[David Harper CFA FRM]

HI asja,

Yes, i was wrong to attach to entire formula in that thread, it applies to credit risk:
"The scaling factor is applied to the risk-weighted asset amounts for credit risk assessed under the IRB approach."

David