Economic Capital Allocation with Basel II

1st Edition

Cost, Benefit and Implementation Procedures

Print ISBN: 9780080973906
eBook ISBN: 9780080472560
Imprint: Butterworth-Heinemann
Published Date: 9th February 2004
Page Count: 448
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Institutional Access


This book is a complimentary follow-on book to Operational Risk Control with Basel II. While the previous book focuses on operational risk, Economic Capital Allocation provides an overview of credit risk within the context of the Basel II accords.

The book provides:

  • comprehensive coverage of the evolution of the banking industry with Basel II in mind
  • extensive information on the capital requirements for bank liquidity and solvency
  • coverage of the new rules as laid down by the supervisory authorities of the Group of Ten industrialized nations
  • key information on the technical requirements for credit institutions such as: new credit rating scales, modeling of credit risk, control of operational risks, and, novel ways and means for the management of exposure to Credit Risk

Key Features

  • Basel II accords must be implemented by 2006 and require 2 years preparation for proper implementation
  • Author at the forefront in the development of the Basel II Capital Adequacy Accord
  • Based on intensive research in the US, UK and continental Europe


Senior Bankers; Chief Executive Officers; Chief Financial Officers; Treasury Executives; Chief Risk Officers; Heads of Economic Capital organizations; and Chief Information Officers.

Table of Contents


BASLE II, IMPACT STUDIES, AND COST OF IMPLEMENTATION; Introduction; The Three Pillars of Basel II; A Birdseye View of Standardized, Foundation IRB, and Advanced IRB Methods; Quantitative Impact Studies and Capital Adequacy; Examples on the Sophistication of the A-IRB Method; The Cost of Basel II; Business Risk and Cost Control; BENEFITS FROM BASEL II: RISK-BASED PRICING AND RATING TARGETS; Introduction; Risk-Based Pricing- A Major Benefit from Basel II; Targeting "AA" and "AAA" by Rating Agencies; Which Way Basel II Will Affect Credit Institutions?; Benefits on the Road from Basel I to Basel II; Basel II Objectives and the Effects of Leverage; The Need for a Devil's Advocate in Risk Management;

REGULATORY CAPITAL DEFINED; Introduction; The Role of Regulatory Capital; Two Components of Regulatory Capital: T-1 and HT-1; Beyond Tier 1: The Tier 2 and Tier 3 Regulatory Capital; Pricing Assets in Tier 1 and Tier 2 Capital; Accounting for Risks Assumed with Lending; Provisioning for Bad Loans Under the New Framework; MARKET DISCIPLINE AND ITS GLOBAL IMPACT; Introduction; Market Discipline and Enhanced Financial Disclosure; Qualitative and Quantitative Information in Financial Reporting; Credit Ratings Are a Tool of Market Discipline; Important Notions About Risk Grades and Rating Systems; Market Discipline and Management of Default Risk; The Ultimate Test of Any Business Operation Is Its Ability to Predict Its own Outcome; THE ALLOCATION OF ECONOMIC CAPITAL TO BUSINESS UNITS: ECONOMIC CAPITAL DEFINED; Introduction; A Close Look at Economic Capital; Emphasizing the Total Economic Equity; Economic Capital, Contingent Assets and Contingent Liabilities; Economic Capital and Management Accounting; The Synergy Between Economic Capital and Risk Management; Economic Capital and the Impact of Default Models; <STRO


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...not only provides a good introduction to the regulatory background, but also shows how economic capital and regulatory capital are concepts that should co-exist and gives good explanations to the background of each. One of the Top Ten financial engineering titles published in 2003-2004 - Richard Norgate, Ph.D., Financial Engineering News