Capital Markets

The following should help guide your answers:
Basel Committee on Banking Supervision. Basel III: Finalising post-crisis reforms (December 2017) 
https://www.bis.org/bcbs/publ/d424.htm
Basel Committee on Banking Supervision. Basel III: A global regulatory framework for more resilient banks and banking systems (revised version June 2011)
https://www.bis.org/publ/bcbs189.htm
APRA Discussion Paper: Implementing Basel III Capital Reforms in Australia September 2011
https://www.apra.gov.au/sites/default/files/basel-iii-discussion-paper-september-2011.pdf
Basel Committee on Banking Supervision. Pillar 3 disclosure requirements – consolidated and enhanced framework
https://www.bis.org/bcbs/publ/d400.pdf
KPMG – Regulatory news – Pillar 3 disclosure requirements for banks
https://home.kpmg.com/ie/en/home/insights/2018/03/regulatory-news-pillar-3-disclosure-requirements-banks.html

Note that further research is required to answer the below questions, in addition to these articles. Please include references where asked. A good method of finding articles is to use Google Scholar (https://scholar.google.com.au/).

Question 1a (1/2 page): Outline the purpose of the Basel Committee on Banking Supervision (Basel Committee).

Question 1b (1 page): In December 2010, the Basel Committee on Banking Supervision (Basel Committee) released a package of reforms to raise the level and quality of regulatory capital in the global banking system (Basel III). Please describe the rationale for these changes and summarise key measures proposed as part of Basel III, including a summary of the three Pillars approach to capital management for banks.

Question 2a (3/4 page): Using APS 113 and other sources, clearly state and compare the credit risk weightings on residential mortgage loans and margin loans using an example of a $600,000 home loan and $600,000 margin loan which each currently have 60% loan-to-valuations ratios (LVR’s). The margin loan has a maximum LVR of 80%. State any assumptions. Explain your answer using references and present your numerical example in a table.

Question 2b (3/4 page): Based on the credit risk weightings you found in the previous question, would you expect the home loan or the margin loan to have a higher interest rate? Does this reflect actual interest rates in the market (quote your sources)? If not, what may be the reason for the difference?

Question 3: Using the attached spreadsheet and APRA’s Prudential Standard APS 112 (APS 112):
Question 3a (in spreadsheet): Calculate and enter the correct Credit Risk Weighted Assets into the grey cells for Bank A and Bank B in Table 3a for both on-balance sheet and off-balance sheet activities.

Question 3b (in spreadsheet): Use the calculated data and other information for Banks A & B in table 3a to enter the correct calculations into the grey cells in table 3b.

Question 3c (1/4 page): Make one suitable graph of the banks’ Credit Risk Weighted Assets which can be used to compare their risk profiles. Choose the axis units such as $ or % and graph type such as column, pie or scatterplot which is most useful.

Question 3d (3/4 page): Comment on and compare the two banks’ different risk profiles and ability to absorb losses.

Question 4a (1/4 page): Summarise the Basel Committee on Banking Supervision Pillar 3 disclosure requirements for banks, including the purpose of these requirements.

Question 4b (1/2 page): Read the Pillar 3 disclosures for Macquarie Bank (MBL) and Bendigo and Adelaide Bank (BEN). Outline what is meant by impaired loans and facilities and compare impairment levels between BEN and MBL.
-Macquarie Bank (MBL)
https://static.macquarie.com/dafiles/Internet/mgl/global/shared/about/investors/regulatory-disclosures/2017/Macquarie-Sep-2017-Pillar-3.pdf?v=2
-Bendigo and Adelaide Bank (BEN)
https://www.bendigoadelaide.com.au/public/shareholders/pdf/aps_330/20170930-APS330.pdf

Question 4c (1/4 page): For BEN’s residential mortgage loan portfolio, estimate the average loan-to-valuation ratio (LVR) and other characteristics of the loans. State your assumptions.

Question 4d (1/2 page): In respect to Capital Adequacy for Australian ADIs, compare and contrast the Standardised Approach to Credit Risk and the Internal Ratings-based Approach to Credit Risk.

Question 4e (1/4 page): On page 19 of MBL’s disclosures, why are some of MBL’s residential mortgage exposures classified under the Internal Ratings Based (IRB) approach while others are classified under the Standardised approach?

Question 4f (1/4 page): On page 19 in MBL’s APS 330 Table 7(b), what is the ‘off-balance sheet’ and ‘non-market related’ component of residential mortgages? Be specific and give examples.

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