Risk premium calculus for insured depository institutions is an example of how rules bind innovation in the financial services sector where products offered as subject to bank classification rating. Banking and financial sector risk regulators tie rules to capital to default risk accorded the different categories of institutional assets, as well as off-balance sheet commitments.
The BIF and SAIC regulation of insured depository institutions assigns federal regulator composite ratings in 3 Subgroup risk classifications to banking institution risk. Banks unable to pay their risk premium are the most obvious “at risk” category of institution.
While many large banks are considered TBTF (Too Big to Fail), investment risk still poses a substantial liability to big banks. Bank operations are not assigned a financial category of risk, yet can impact capital position. When an institution is TBTF, there is likelihood that managers have more incentive to increase risk.
BIS: Basel I, Basel II, Basel II, with Basel first put into force in 1992, provide rules to banking institution stress tests. With the enactment of Basel II in 2008, risk-based capital standards have been implemented to make Basel I rules more stringent in designation of risk classes accorded to bank tier capital. Risk-weighted ratios attributed to the different categories of risk are now more precise
Basel III implementation in the U.S. in 2013, instituted a minimum leverage ratio of 6% to 8% for systemically important financial institutions (SIFI), and 5% for insured bank holding companies, as well as new capital adequacy rules, stress testing, and market liquidity risk.Financial Innovation: A Risky Business?
- ISBN 978-0-81608-617-7
- Run Time (64 Minutes)
- Copyright 2012
- Closed Captioned (CC)