If you’re afraid to admit that you don’t know the difference between an RWA, a CCF, and an EL, you’re not alone. In the past, we could leave this to the PhDs in the treasury to sort out — they kindly inform us our cost of capital and cost of funds and we carry on lending.
That won’t cut it anymore. Capital regulations and management are being integrated into the lending model from the board down to the most granular lending decision. So, where should you start?
The regulations. Unless you are suffering from insomnia, it is understandable that you are not interested in reading the 333 pages of the original Basel II accord (http://www.bis.org/publ/bcbs128.pdf) . It includes gems like this:
By now, you may have learned that EL=PD x LGD x EAD, and maybe you’ve seen some of these capital formulas. Your first stop should be this handy article (fondly referred to as the Dummy’s Guide to Basel) http://www.bis.org/bcbs/irbriskweight.pdf
If you thought that you could skip Basel II since we already are on Basel III, you’d be wrong. Basel II capital calculations and allocation is just the pre-requisite for the fun we’ll have with Basel III.
But what does it all mean? What does this capital equation really mean to your lending business? Where can you start?
The interwebs and blogosphere. Normally, we would caution against relying on blog opinions as the best practice for leaning technical information. However, the practice of reading and interpreting opinions and summaries can be a good way to get started. Here are some blog sites you might find interesting:
Newsfeeds and regulatory updates. Subscribe to your home regulator’s newsfeed, along with BIS updates:
You’ll know when new regulations, speeches, and policy issues arise. Then, talk to you colleagues, ask questions, have a discussion or debate, and we’ll figure it out together.
What are your favorite blogs and newsfeeds? Let us know!
Learn more about how we can help clear up the confusion with our CreditLab: Basel course!
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