Risk Management and Capital Adequacy

All financial institutions subject to banking laws are required to support risk exposures with capital. This means that every transaction the bank executes on behalf of its clients must be supported by capital. The same happens for a mortgage granted to the clients. Some well-defined regulatory rules decide how much capital has to be put aside in order to support the credit risk exposure of the bank. The purpose is to build up reserves for the banks in order to protect the clients and the counterparties of the banks. Obviously, every bank has a natural interest to keep the risk capital low, as this capital is "fixed" and cannot be used for other purposes than as a reserve for granting security to the clients. The banks could invest this capital in other business projects and generate profits, thus they have an interest to understand how to keep the risk capital low. There are many types of risks associated with financial transactions. Market risk regulation is the most sophisticated; credit risk is the oldest form of banking risk management. And operational risk is not (yet) supported by capital. But in 2005 this will change with the coming Basle guidelines.; In 2000, The global supervisory committee, the Basle Committee from the Bank of International Settlement sent out the latest draft for review by the different national authorities. By 2005, the new regulations are planned to be integrated and enforced by the national authorities (in US it is the Federal Reserve Board). And all banking organizations will have to calculate capital requirements according to the new Basle guidelines. These regulatory modifications will be immense, as they completely change the way banks have to calculate the credit and operational risk exposures. And the entire risk exposure (covering Risk Management and Capital Adequacy of each transaction must be supported. Risk Management and Capital Adequacy highlights the key risk approaches for all the risk categories and analyzes if and how the different risk categories can be combined (integrated), and to which extent this is possible at all. The different business areas, such as the credit business or the market risk business have completely different backgrounds, developed from different historical roots and are embedded in different business lines with unique IT-infrastructure, people and human competence.; This will be the first book on the market that truly integrates all the risks.