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Australiaa€™s four largest banks can be considered domestically systemic. They make up the liona€™s share of the banking system, use similar business models, and are interconnected. The top four banks are relatively similar in terms of systemic importance, partly reflecting the authoritiesa€™ ?four pillar? policy, which aims at preventing the number of large banks from falling below four. To deal with systemic risks, the authorities deploy a multi-pronged approach consisting of risk-based supervision, recovery and resolution planning, and conservative risk weights and definitions of loss absorbent capital. Most countries that have already identified strategies to deal with their systemic institutions incorporate higher loss absorbency for systemic institutions in their approach. Market based methodologies using the expected default frequency for systemic institutions can gauge the amount of additional capitala€”higher loss absorbencya€”required to reduce the probability of failure of systemic institutions to an acceptable level. Alternatively, the implied funding cost advantage can indicate the degree of systemic importance and be used to define higher capital requirements to offset this implicit subsidy. Application of these methods to Australian banks provides a range of estimates of higher loss absorbency requirements for systemic institutions and a transparent framework for discussion and selection of these requirements.Addressing Systemic Risk Through Higher Loss Absorbencya€”Technical Note International Monetary Fund. Annex 1. Contingent Claims Analysis Contingent claims analysis is a generalization of the option pricing theory pioneered by Black-Scholes (1973) and Merton (1973). Since 1973, the option ... The formula for theanbsp;...

Author:International Monetary Fund
Publisher:International Monetary Fund - 2012-11-21


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