Risk Management

1. Minimum capital requirements

   - quantitative, risk oriented
   - defines a minimum of capital for banks

2. Supervisory Review Process

   - qualitative requirements - 4 principles

3. Market Discipline

   (market discipline enforced through risk transparency provided by risk disclosure)
   - qualitative and quantitative requirements

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.

The BIA uses gross income (GI) as the decisive OpR risk indicator. The capital requirement is a linear function in the three year average of GI.

Whereas only positive years of the three year period are considered. Years with GI<0 are not considered at all. Average GI multiplied by α (= 15%) yields the capital requirement.

Gross income is defined as net interest income plus net non-interest income. It is intended that this measure should: (i) be gross of any provisions (e.g. for unpaid interest); (ii) be gross of operating expenses, including fees paid to outsourcing service providers; (iii) exclude realized profits/losses from the sale of securities in the banking book; and (iv) exclude extraordinary or irregular items as well as income derived from insuranc

The capital requirement is the sum of the gross income multiplied by the beta-factor of each business lines (BL). The beta-factors are differentiated according to a “perceived risikness” of the BL.

A negative gross income (GI) of a BL are considered in the capital requirement calculation. Years with a negative total GI are omitted as in the BIA.

A variant of TSA (called the Alternative SA (ASA)) is based on the sum of loans of the balance sheet. ASA is only allowed for the business lines retail banking and commercial banking. The loans are weighted with 3.5% (= input into calculation in place of GI). The same BL beta factors are used.

The bank models OpR risk based on internal and external information (e.g. based on operational losses). The model delivers the capital requirement (risk capital) according to certain parameters.

The reference period for risk capital (RC) is one year.

RC is the potential total operational loss of the bank that should not be exceeded within one year with a probability of 99.9%.

The risk capital (= regulatory capital requirement) is defined as:

RC = Expected Loss [E(L)] + unexpected Loss [U(L)]

or RC = U(L), if the bank can proof that the E(L) is measured as well as accurately and fully provisioned.

Siehe Zusammenfassung!

Within the risk policy, business lines and processes you fist identify risks, measure them,
model them and manage it and all over again. This process is influenced by law/regulations
and competition and market.

In equilibrium the market has eliminated price differences. So only systematic risk that
cannot be eliminated with further diversification is compensated.
If you have 2 stocks that are identical but one has still a higher price than you can exploit
such price differences by selling stock A and buying stock B and making a profit. This is called
arbitrage.