Michael Barr on stress testing in turbulent times

Basel III and IV are international banking regulations designed to strengthen bank capital requirements. They use advanced measures like Value at Risk (VaR), stress testing, and leverage ratios to ensure banks can absorb shocks and remain solvent. Capital Adequacy Ratio: Ensures banks have enough capital relative to their risk-weighted assets. Liquidity Coverage Ratio (LCR): Requires sufficient high-quality liquid assets to survive a 30-day stress scenario. Leverage Ratio: Limits total bank exposure compared to capital to prevent over-leverage. check out my calculator: https://lnkd.in/gbuWnzxX

The Basel III framework is a central element of the Basel Committee's response to the global financial crisis. It addresses shortcomings of the pre-crisis regulatory framework and provides a regulatory foundation for a resilient banking system that supports the real economy. A key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets (RWA). At the peak of the global financial crisis, a wide range of stakeholders lost faith in banks' reported risk-weighted capital ratios. The Committee's own empirical analyses also highlighted a worrying degree of variability in banks' calculation of RWA. The revisions to the regulatory framework will help restore credibility in the calculation of RWA by: *enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the *comparability of banks' capital ratios *constraining the use of internally modelled approaches *complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor

Banks move markets, not just money. That’s why the rules that govern them matter more than ever. In Introduction to Banking Regulation, part of our Banking Essentials learning pathway, banking-regulation expert Peter Eisenhardt demystifies the rules that keep the global financial system secure. ➡️ Understand how bank regulation is organised — from prudential rules to systemic risk controls ➡️ Explore the role of cross-border co-operation through the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB) ➡️ Discover why regulators prioritise stability over shareholder returns — and how that trade-off keeps economies safe Then continue the pathway to explore The History of Bank Capital Requirements, led by financial-markets expert Tim Skeet, to learn how Basel I through IV evolved to strengthen resilience and prevent taxpayer-funded bailouts. Together, these sessions reveal how modern banking regulation protects investors, promotes confidence, and helps prevent the crises of tomorrow. 👉 Explore the full pathway via the link in the comment below #BankingRegulation #FinanceMarkets #BaselFramework #FinancialStability #RiskManagement

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📊 Optimising Bank Balance Sheets with Significant Risk Transfer (SRT) How can banks enhance profitability while maintaining regulatory capital and liquidity requirements? 💡Our latest article explores a quantitative optimisation framework that integrates Significant Risk Transfer (SRT) with dynamic asset allocation to boost balance sheet efficiency. Backtesting shows measurable impact +0.17pp ROA and +1.98pp ROE  by using SRTs not just for risk relief, but as drivers of better capital deployment. Rather than viewing SRTs purely as risk mitigation tools, our framework positions them as strategic enablers. 🔍 Read the full article here: 👉 https://lnkd.in/dmTyxZJU #Securitisation #SRT #RiskTransfer #CapitalMarkets #BalanceSheetOptimisation #StructuredFinance #BankingStrategy #RiskManagement #FinancialInnovation #AccuriaInsights

I am delighted to discuss our work on bank balance sheet optimisation with significant risk transfer (SRT) at the upcoming SCI World Risk Sharing Summit 2025 in London on October 15th. The use of SRT is on the rise globally and the research results published for major US banks are equally relevant in Europe. We are happy to announce five new risk transfer transactions across the CEE region bringing our securitisation and NPL assets under reporting to over EUR 110 billion. https://lnkd.in/djTvF9H3

#SRT - "..Quantitative optimisation framework that integrates Significant Risk Transfer (SRT) with dynamic asset allocation to boost bank balance sheet efficiency....Rather than viewing SRTs purely as risk-mitigation tools, our framework positions them as strategic enablers of better capital deployment."

Regulatory Deep Dive: Diagnosing a Bank Failure When the RBI steps in, every minute counts. Our intensive Regulation Rescue Simulation recently put us in the hot seat, challenging our team to swiftly diagnose a failing bank and craft a robust turnaround plan under immense pressure. The ultimate diagnostic tool in our arsenal? The internationally recognized CAMELS framework 📊. It’s the gold standard for assessing a bank’s fundamental soundness and risk profile. 💡 CAMELS Deep Dive: The Six Pillars In a rescue scenario, a holistic evaluation is paramount. Here is how we break down the six critical components: C - Capital Adequacy 💰: The bank's financial buffer. We scrutinize the Tier 1 and Tier 2 ratios to ensure the capital base is sufficient to absorb unexpected losses, particularly relative to its risk-weighted assets. A - Asset Quality 🛡️: The health of the loan book. This means assessing the volume of Non-Performing Assets (NPAs), the adequacy of loan loss reserves, and the overall credit risk exposure. M - Management Capability 🧑💼: A qualitative assessment of the board's competence, strategic direction, and ability to identify, measure, monitor, and control risks. Strong governance is non-negotiable for stability. E - Earnings 📈: Analyzing the volume and quality of earnings. Core earnings stability (Net Interest Income) over volatile sources (Trading Income) is key to the internal capital generation. L - Liquidity 💧: The immediate ability to meet obligations. We look at the Liquidity Coverage Ratio (LCR) and stability of funding sources—the first area demanding action in a crisis. S - Sensitivity to Market Risk 📉: Gauging exposure to fluctuations in interest rates, foreign exchange rates, and equity prices. Crucial for assessing the long-term vulnerability of the balance sheet. 🎯 Our Simulation’s Key Finding While all factors play a role, our exercise confirmed that a quick rescue requires laser focus on the core drivers of immediate risk: Liquidity Stabilization: Immediate, decisive action to restore confidence and cover short-term liabilities. Earnings Fortification: Initiating swift measures for aggressive asset recovery and optimizing the cost-to-income ratio to ensure future capital generation. The Professional Challenge The CAMELS system is strong, but regulations are always evolving. If you had the power to change one financial regulation tomorrow to enhance banking stability in the Indian context, what specific rule would you modify and why? #BankDoctorChallenge #FinancialRegulation #Banking #RBI #Compliance #RiskManagement

𝐒𝐰𝐚𝐩𝐬 𝐚𝐧𝐝 𝐂𝐫𝐞𝐝𝐢𝐭 𝐑𝐢𝐬𝐤: 𝐖𝐡𝐲 𝐘𝐨𝐮𝐫 𝐂𝐨𝐮𝐧𝐭𝐞𝐫𝐩𝐚𝐫𝐭𝐲 𝐌𝐚𝐭𝐭𝐞𝐫𝐬 𝐌𝐨𝐫𝐞 𝐓𝐡𝐚𝐧 𝐘𝐨𝐮 𝐓𝐡𝐢𝐧𝐤⚖️ Think of a swap like a seesaw between two playground friends. Each side promises to pay the other under certain conditions. But here’s the catch: if one friend suddenly disappears or can’t hold up their end, the other is left dangling mid-air. That’s credit risk exposure in a swap, it is the risk that your counterparty defaults before the swap matures. Here’s how to break it down: 𝟭. 𝗠𝗮𝗿𝗸-𝘁𝗼-𝗠𝗮𝗿𝗸𝗲𝘁 (𝗠𝗧𝗠) 𝗩𝗮𝗹𝘂𝗲: The current value of the swap. If it’s positive for you, that’s what you’re exposed to if the counterparty defaults tomorrow. 𝟮. 𝗣𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹 𝗙𝘂𝘁𝘂𝗿𝗲 𝗘𝘅𝗽𝗼𝘀𝘂𝗿𝗲 (𝗣𝗙𝗘): The “what if” scenario, how much could you stand to lose as market rates fluctuate over the life of the swap. 𝟯. 𝗡𝗲𝘁𝘁𝗶𝗻𝗴 & 𝗖𝗼𝗹𝗹𝗮𝘁𝗲𝗿𝗮𝗹: Think of this as seat belts on the seesaw. Netting agreements reduce exposure across multiple swaps, and collateral acts as insurance against sudden defaults. 𝟰. 𝗥𝗶𝘀𝗸 𝗗𝗿𝗶𝘃𝗲𝗿𝘀: Interest rate changes, FX volatility, or creditworthiness shifts, all can increase your exposure unexpectedly. What this really means is: even if a swap seems balanced today, your risk depends entirely on the other side keeping their promise. Understanding this exposure is crucial for traders, risk managers, and CFOs aiming to safeguard capital. If you manage swaps, which risk measure do you rely on the most: MTM, PFE, or both? Let’s discuss 👇 #CreditRisk #Swaps #Derivatives #RiskManagement #Finance #FinancialMarkets #Hedging #Treasury #CounterpartyRisk #MarketRisk #LinkedInLearning

Borderless banking solutions are crucial for businesses looking to regain control of liquidity, risk management and FX flexibility in today’s ever-changing international trade environment. Learn more here: https://lnkd.in/gqi8Pveq.