Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

A new BIS regulation: Basel II

The Basel Committee on Banking Supervision and the banking community have negotiated a new agreement, referred to as Basel II, that demands less capital for safe loans and more capital for risky loans. The aim is to bring the BIS capital guidelines in line with the economic capital allocation of banks. This will make life much easier for banks as economic capital will be closer to regulatory capital. Adopted in June 2004, it will be applied, at the earliest, in January 2007. Basel II is discussed in Stage 8.

Key Points The break-even rate on a loan is the rate at which there is no value creation. ‘Equity’ spread: ...