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Quantitative Example

Quantitative Example

A hypothetical UK Clearing bank might have the following grossly simplified balance sheet and annual earnings figure.

fig2-1-2

In the Quantitative Impact Study (3), the Basel Committee found that the average minimum capital requirement for EU big banks changed by

Standardised Approach for Credit Risk – 3%

Or Foundation IRB Approach for Credit Risk – 13%

Or Advanced IRB Approach for Credit Risk – 15%

And Operational risk + 9%

However the individual banks varied between +30% and –40%. Thus our hypothetical UK Clearing Bank might need an extra £2bn of capital or be able to shed £8Bn.

This would reduce the earnings per share by 6% or increase it by 36%, presumably with an equivalent effect on the share price.

Despite the size of these numbers, many feel the real concern of senior bank managers is the reputational impact on share price. They are worried about what could ensue from not being a bank allowed to use the sophisticated capital adequacy measurement techniques. It is feared that shareholders and ratings agencies will penalise those banks that are perceived to be lagging behind.

Back to What is Basel II?

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