The purpose of this seminar is to give you an in-depth understanding of and "hands-on" experience with the Basel II principles for measuring credit risk.
We will start with a brief, overall introduction to credit risk and to the Basel II framework and its "Three-Pillar Approach". We will give an account of the historical development of Basel I and II, and will discuss possible consequences of Basel II for banks and corporations, as well as for the global financial system. We will also give a thorough review of recent enhancements to the Basel II framework following the "financial meltdown" of 2007/2008.
We explain in detail the different approaches to measuring credit risk. First, we will look at the standardized approach, explaining the general rules of applying external ratings to bonds, loans and other assets. Numerous examples will be used to show how regulatory capital is calculated.
We then give an in-depth explanation of the two "Internal Ratings-Based" approaches, Foundation and Advanced. In each case, we explain and illustrate the relevant mechanics of the different approaches and demonstrate how the risk weights are derived for corporate, sovereign, bank, retail and equity exposures. We will also look at how the individual risk components such as "Probability of Default" (PD), "Loss Given Default" (LGD), "Exposure at Default" (EAD) and "Effective Maturity" (M) are calculated for different on-balance as well as for off-balance instruments, using the "Point-in-Time" as well as the "Trough-the-Cycle" approaches. We also explain the principles for internal and external validation of internal rating systems.
We will then look at the treatment of risk mitigation techniques such as collateral and credit derivatives, and we give a thorough explanation of the enhanced rules for treatment of securitisations, resecuritisations, liquidity facilities, self-guarantees etc. under the standardised and the IRB approaches.
Finally, we will discuss some practical aspects of the implementation of Basel II, including systems and data requirements and the regulatory review process. In particular, we will discuss possible further supervisory improvements to the Basel II framework and their consequences for future regulatory capital levels.
We will also discuss how Basel II can be integrated into an overall ERM framework and how you can actually make money from Basel II "compliance".