Better banking : understanding and addressing the failures in risk management, governance and regulation

375 Pages·2014·11.98 MB·English

by  Docherty

Better Banking
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Better Banking
Understanding and Addressing the Failures in Risk
Management, Governance and Regulation
Adrian Docherty and Franck Viort
© 2014 Adrian Docherty and Franck Viort
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John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
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Library of Congress Cataloging-in-Publication Data
Docherty, Adrian, 1969-
Better banking : understanding and addressing the failures in risk management,
governance and regulation/Adrian Docherty and Franck Viort.
pages cm
Includes index.
ISBN 978-1-118-65130-8 (cloth)
1. Banks and banking. 2. Banks and banking–Risk management. 3. Banks and
banking–State supervision. 4. Bank management. I. Viort, Franck, 1972- II. Title.
HG1601.D55 2014
332.1–dc23
2013043103
A catalogue record for this book is available from the British Library.
ISBN 978-1-118-65130-8 (hbk) ISBN 978-1-118-65132-2 (ebk)
ISBN 978-1-118-65133-9 (ebk) ISBN 978-1-118-65131-5 (ebk)
Set in 10/12 Times LT Std by Aptara, New Delhi, India
Printed in Great Britain by CPI Group (UK) Ltd, Croydon, CR0 4YY
To our wives,
Bénédicte and Justine, and our children:
Agathe, Elise, Lucy, Robin and Sophie.

Contents
Acknowledgements xi
1 Introduction 1
1.1 Overview and Objectives 1
1.2 Quick Start Guide to Banking Concepts and Regulation 4
2 The Global Financial Crisis 7
2.1 From Deregulation to dotcom Crash 7
2.2 The Seeds of a Crisis 9
2.3 “Why Didn’t Anyone See This Coming?” 14
2.4 The Beginnings of a Crisis 17
2.5 The Crisis Intensifi es 20
2.6 Meltdown: The Lehman Bankruptcy 21
2.7 Massive Intervention Internationally 23
2.8 Sovereign Crises 29
2.9 Aftershocks and Skeletons in the Cupboard 32
2.10 Who is to Blame? 34
3 Methodologies and Foundations 37
3.1 How do Banks Make or Lose Money? 37
3.2 What’s a Bank Worth? Key Issues in Accounting for Banks 41
3.3 What is Risk? 47
3.4 What is an RWA? 55
3.5 What is Capital? 61
3.5.1 Regulatory Capital 63
3.5.2 Hybrid Capital 65
3.5.3 Economic Capital and Ratings Capital 66
3.5.4 Cost-of-Capital and Return-on-Capital 66
3.5.5 Capital in a Stress Scenario 67
3.5.6 Bail-in Capital 67
viii Contents
3.6 What are Liquidity and Funding? 68
3.6.1 Concepts 68
3.6.2 Liquidity Management and Liquidity Risk 69
3.6.3 Interbank Funding, the Money Markets and Central Bank Support 72
3.6.4 Deposit Guarantee Schemes 76
3.6.5 Securitisation 77
3.6.6 Covered Bonds 81
3.6.7 Liquidity Stress Tests 83
3.7 What is a Derivative? 84
3.8 Mark-to-Market and Procyclicality 90
3.9 Role of Regulation, Supervision and Support 96
3.10 Ratings Agencies and Credit Ratings 101
3.10.1 Moody’s Bank Methodology 104
3.10.2 S&P’s Bank Methodology 104
3.10.3 Structured Finance Ratings 105
3.10.4 Use of Ratings in Regulation and Investment Policy 107
3.11 Analysts, Investors and Financial Communication 109
4 Regulation of the Banking Industry 113
4.1 The Relevance of Bank Regulation and Supervision 113
4.2 Regulation and Supervision of the Banking Industry Prior to “Basel I” 113
4.3 The Basel Capital Accord aka “Basel I” 117
4.3.1 Defi nition of Capital 118
4.3.2 Deductions Regime 119
4.3.3 Risk-Weighting Approach 120
4.3.4 Ratio of Capital to Risk Weighted Assets 121
4.3.5 Modifi cations to Basel I 121
4.3.6 Impact of Basel I 122
4.4 Basel II 122
4.4.1 Objectives of Basel II 123
4.4.2 The Three-Pillar Approach 123
4.4.3 Pillar 1: Minimum Capital Requirements 124
4.4.4 Pillar 2: Supervisory Review 130
4.4.5 Pillar 3: Market Discipline 132
4.4.6 Capital Calibration 133
4.4.7 Capital Supply and Mix 135
4.4.8 Implementation of Basel II 136
4.4.9 Critique of Basel II 137
4.5 Basel III 141
4.5.1 Defi nition of Capital 142
4.5.2 Deductions 143
4.5.3 Risk-Weighted Assets 145
4.5.4 Minimum Capital Levels 147
4.5.5 Leverage Ratio 150
4.5.6 Liquidity and Funding 152
4.5.7 Derivatives Risk Management 155
4.5.8 Implementation and Transition 156