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Lessons from implementations of Basel II and for Solvency II Workshop Sydney 2006, Manley Beach

Lessons from implementations of Basel II and for Solvency II Workshop Sydney 2006, Manley Beach. gerhard.stahl@bafin.de and stefan.jaschke@bafin.de. Agenda. Part 0: Who is QRM & cross-sectoral overview Part 1: Market risk models for the trading book of banks

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Lessons from implementations of Basel II and for Solvency II Workshop Sydney 2006, Manley Beach

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  1. Lessons from implementations of Basel II and for Solvency IIWorkshop Sydney 2006, Manley Beach gerhard.stahl@bafin.de and stefan.jaschke@bafin.de Sydney December 11, 2006 Seite 1

  2. Agenda Part 0: Who is QRM & cross-sectoral overview Part 1: Market risk models for the trading book of banks Part 2: Credit risk models at banks Part 3: Operational risk models at banks Part 4: Market risk models at investment funds Part 5: Holistic models at insurers (Solvency II) Part 6: Economic capital and use test Sydney December 11, 2006 | 22.09.2014 Seite 2

  3. Lessons from implementations of Basel I & II and for Solvency II-Who is QRM & cross-sectoral overview Sydney December 11, 2006 Seite 3

  4. BaFin as the German financial regulator • As from BaFin’s mission statement: • Preserve stability of the German financial system • Maintain confidence of investors and consumers • Safeguard fair behaviour of market participants • BaFin approach: • Integrated supervision (banking, insurance, financial services) • Risk identification and risk limitation • Prevention before punishment • Principle based (not rule based) regulation Sydney December 11, 2006 | 22.09.2014 Seite 4

  5. QRM experiences from banks, funds & insurers Sydney December 11, 2006 | 22.09.2014 Seite 5

  6. QRM: RISQUE is our Business • Regulation • Inspections • Supervision • Quantitative Methods • Uniformly across the whole financial market • Excellence Sydney December 11, 2006 | 22.09.2014 Seite 6

  7. Responsibilities of Q RM • On-site inspections for market risk models, IRBA, IRB, • OpRisk, …, Solvency II, …. • Principal work for any type of risk model • Research • special audits according to § 44 banking act • international groups as far as risk models are in focus • representing the BaFin in international groups (Basel,..) Sydney December 11, 2006 | 22.09.2014 Seite 7

  8. Regulatory Activities – Memberships in Working Groups • Working Groups • AIG validation subgroup • CEBS validation subgroup ü • RTF on concentration risk ü • RTF intersection of market and credit risk • Co-chairing BCBS working group on liquidity risk • national IRBA Working Group (BaFin + Bundesbank) • national OpRisk Working Group (BaFin + Bundesbank) • BaFin Working Group on the relation between Solvency II and Basel II Sydney December 11, 2006 | 22.09.2014 Seite 8

  9. Cross-sectoral supervision by QRM on-site inspections of internal models: Sydney December 11, 2006 | 22.09.2014 Seite 9

  10. Internal Model (IM) Auditing • Background • Regulation in Germany was almost juridical, typically off-site supervision, before 1997 • Development of auditing expertise at BaFin and Deutsche Bundesbank since 1996 • Institutions may use suitable internal risk models for determining the capital charges or partial capital charges for the market risk since 1997, provided that BaFin has confirmed their suitability in writing upon the institution's request (“Principle I concerning the capital of institutions” ) Sydney December 11, 2006 | 22.09.2014 Seite 10

  11. We are living in a risk society - Lessons from IM for Basel II • Stochastic modelling and regulation • Non-linear instruments, complex hedging strategies • Large-scale forecasting models with thousands of variables • Portfolio view of risk • Are multivariate non-linear stochastic models complex? • No! – the complexity comes from the interdisciplinary use of VaR-Models • The risk management process itself is a tool to reduce complexity Sydney December 11, 2006 | 22.09.2014 Seite 11

  12. Market Risk - Internal Model Banks • GeneralSpecific Market Risk Market Risk It currently comprises 16 banks Risk CategoryFXCommodityEquityInterest Rate Sydney December 11, 2006 | 22.09.2014 Seite 12

  13. Market Risk - Aggregation • GeneralSpecific Market Risk Market Risk • Total Market Risk (MR): • Aggr. of Specific and General MR under null correlation Risk CategoryFXCommodityEquityInterest Rate • General Market Risk (MR): • Correlations are considered • Specific Market Risk (MR): • Aggr. of Specific MR for Equities and and Specific MR for Interest Rate under null correlation Sydney December 11, 2006 | 22.09.2014 Seite 13

  14. IM Auditing Process Overview • Decomposition of the risk management process from the regulator perspective in accordance with the requirements of Principal I concerning the capital of institutions Sydney December 11, 2006 | 22.09.2014 Seite 14

  15. THE BUSINESS BUSINESS SYSTEMS SELF-ASSESS Teams Processes Projects Agree objectives ID risks Assess risks RM strategy Understandingbuy-in action plans responsibility OBJECTIVES RISKS Risk management strategy INTERNAL CONTROLS Statement on internal control OUTCOMES Process based auditing Sydney December 11, 2006 | 22.09.2014 Seite 15

  16. The Institute of Internal Auditors (IIA) Definition • “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation‘s operations. It helps an organisation ac-complish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process” Sydney December 11, 2006 | 22.09.2014 Seite 16

  17. Investment funds, banks, insurers complexity of products re-insurers derivates houses hedge funds insurers banks funds complexity of risk drivers Sydney December 11, 2006 | 22.09.2014 Seite 17

  18. Similarities and Differences Sydney December 11, 2006 | 22.09.2014 Seite 18

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