Youtube - Standard Approach to Credit Risk under Basel II

[ichew]

Hi David

I just finished watching the video on the
"Standard Approach to Credit Risk under Basel II"

I wanted to know if the formula is:

Total Capital/ RWA (Credit Risk) + Market Risk+ Operational Risk > 8%

Why are we multiplying the exposure to the credit risk portion by 8%?

Isn't it a combination of all 3 risk factors? So wouldn't we need to know the market risk and operation risk portion of the denominator too before multiplying the exposure by 8%?

Thanks

Irving

 

[ShaktiRathore]

HI,
Under standard approach we just need to multiply the 8% by the associated risk RWA. Its the method used under standard approach so that is it. And since topic is Standard Approach to Credit Risk under Basel II we just need to calculate the capital required to cover credit risk and not the other risks. I think the author here would be just focusing on credit risk and would be just calculating the capital required for credit risk.
hope it might help

 

[David Harper CFA FRM]

Hi Irving,

This refers to

I agree with ShaktiRathore: the topic is just credit risk, so it's common to ask (eg), what is the capital charge for credit required for a $10 million loan? This loan won't have an operational risk charge. But the bank will need to roll up all three risk buckets from various exposures, so in aggregation, the three exposure buckets (credit, market, operational) are added. Thanks,

 

[kevinbacon]

I mean it you have so much knowledge about this issue and so much passion. I will keep visiting this forum very often.