Critical Evaluation of Basel Ii

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BKM021-Financial Services Regulation & Compliance - Assessment 1 |

Mariyam Najeela K0951846 |

26th March 2010 |

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Contents

Part (A) (i) the solvency margin for banks under the Basel Accord II 2

Part (A) (ii) the solvency margin for life and non-life insurance companies under the EU Solvency I 5

The solvency margin for non-life insurance companies under the EU Solvency I 5

The solvency margin for life insurance companies under the EU Solvency I 6

Part (B) (i) critical evaluation of the effectiveness of the Basel Accord II for banks 7

Strengths of Basel II 7

Weaknesses and Challenges Ahead for Basel II 8

Part (B) (ii) critical evaluation of EU Solvency II for life and non-life insurance companies 10

Advantages of Solvency II 11

Challenges faced by Solvency II 11

Part (A) (i) the solvency margin for banks under the Basel Accord II

Under Basel II, solvency margin is calculated by taking into account three types of risks (1) credit, (2) risk, market risk and (3) operational risk. There are different options for credit risk.

Source: Valová 2007

Credit Risk

1. Standardised Approach in which the risk weights are derived from ratings set by external credit assessment institutions.

2. Internal Ratings Base (IRB)

a. Foundation IRB Approach- bank uses own estimates of probability of default of its clients and other characteristics are defined by the supervisor.

b. Advances IRB Approach - all the components are determined by the bank.

Market Risk

1. Basic Indicator Approach – fixed percentage of banks net income

2. Standardized Approach –separate for each business line as fixed percentage

3. Alternative Standardized Approach- discretion of supervisor

4. Advanced Measurement Approach – banks own models can be used

Definition of Capital included in the Capital Base.

Capital Elements

Tier 1 or core capital.

a) Permanent shareholders’ equity

b) Disclosed reserves...