BRRD Principles and Scope
Expert-defined terms from the Masterclass Certificate in BRRD Stress Testing Techniques course at London School of Business and Administration. Free to read, free to share, paired with a professional course.
A-IRB Approach refers to the Advanced Internal Ratings-Based Approach, a method… #
The A-IRB Approach allows banks to use their own internal models to estimate potential losses, providing a more accurate assessment of their credit risk. This approach is considered more advanced than the Foundation Internal Ratings-Based Approach, as it takes into account a broader range of risk factors and allows for more nuanced calculations. Banks that use the A-IRB Approach must meet specific requirements and guidelines set by regulatory bodies.
Asset Encumbrance is the extent to which a bank's assets are pledged or otherwis… #
Asset encumbrance can limit a bank's ability to use its assets to meet its financial obligations, making it a critical consideration in stress testing and risk management. High levels of asset encumbrance can increase a bank's vulnerability to financial shocks and reduce its ability to respond to changing market conditions.
Backtesting is the process of evaluating the performance of a risk model or stre… #
Backtesting is an essential component of stress testing, as it helps to identify areas where models may be flawed or incomplete. By comparing predicted outcomes with actual results, banks can refine their models and improve their ability to anticipate and respond to potential risks.
Basel Accords refer to a set of international banking regulations developed by t… #
The Basel Accords aim to promote financial stability and prevent bank failures by setting minimum standards for bank capital, liquidity, and risk management. The accords have undergone several revisions, with Basel III being the most recent iteration, which introduced stricter capital and liquidity requirements for banks.
BRRD stands for Bank Recovery and Resolution Directive, a European Union directi… #
The BRRD requires banks to develop recovery plans that outline the steps they would take in the event of financial distress, as well as resolution plans that detail how they would be wound down in an orderly manner if they fail. The BRRD also introduces the concept of a bail-in, where creditors' claims are written down or converted into equity to absorb losses.
Business Continuity Planning refers to the process of developing strategies and… #
Business continuity planning involves identifying critical functions and processes, assessing potential risks and threats, and developing plans to mitigate or manage those risks. This includes establishing backup systems, training staff, and developing communication protocols to ensure that the bank can continue to provide essential services to its customers.
Capital Adequacy refers to a bank's ability to meet its regulatory capital requi… #
Capital adequacy is a critical component of bank regulation, as it helps to ensure that banks have sufficient capital to absorb potential losses and maintain financial stability. Banks must meet minimum capital adequacy ratios, which are set by regulatory bodies and vary depending on the bank's risk profile and business activities.
Contagion Risk refers to the potential for a financial crisis or instability in… #
Contagion risk can arise from a variety of sources, including common exposures, interconnectedness, and market sentiment. Banks must consider contagion risk when developing their stress testing scenarios and risk management strategies, as it can have a significant impact on their financial stability and resilience.
Core Capital refers to a bank's highest quality capital, which includes common e… #
Core capital is considered the most reliable form of capital, as it is permanent and can absorb losses without triggering a bank's insolvency. Banks must meet minimum core capital requirements, which are set by regulatory bodies and vary depending on the bank's risk profile and business activities.
Credit Risk refers to the potential for a borrower to default on their obligatio… #
Credit risk is a critical component of bank risk management, as it can have a significant impact on a bank's financial stability and resilience. Banks must develop strategies to manage credit risk, including credit scoring, collateral requirements, and provisioning.
Credit Valuation Adjustment refers to the adjustment made to the value of a deri… #
Credit valuation adjustment is an important consideration in stress testing and risk management, as it can have a significant impact on a bank's financial stability and resilience.
Deposit Guarantee Scheme refers to a system that protects depositors in the even… #
Deposit guarantee schemes aim to maintain financial stability and prevent bank runs by providing depositors with confidence that their funds are safe. These schemes typically involve a fund that is used to reimburse depositors in the event of a bank failure.
Early Intervention Measures refer to the steps taken by regulators to address po… #
Early intervention measures can include increased supervision, additional capital requirements, or other measures designed to prevent a bank's situation from deteriorating.
Economic Capital refers to the amount of capital that a bank needs to hold to co… #
Economic capital is a critical component of bank risk management, as it helps to ensure that a bank has sufficient capital to absorb potential losses and maintain financial stability. Economic capital is typically calculated using advanced risk models and stress testing scenarios.
Financial Stability refers to the ability of a financial system to withstand sho… #
Financial stability is a critical consideration in stress testing and risk management, as it can have a significant impact on the broader economy and society. Regulators and banks must work together to promote financial stability by developing and implementing effective risk management strategies.
Going Concern refers to the assumption that a bank will continue to operate for… #
Going concern is an important consideration in financial reporting and stress testing, as it affects the way that assets and liabilities are valued and the assumptions that are made about a bank's future prospects.
Governance refers to the system of rules, practices, and processes by which a ba… #
Governance is a critical component of bank risk management, as it helps to ensure that a bank is managed in a responsible and effective manner. Good governance involves a clear division of responsibilities, effective oversight, and a strong risk culture.
Idiosyncratic Risk refers to the unique risks faced by a particular bank or inst… #
Idiosyncratic risk is an important consideration in stress testing and risk management, as it can have a significant impact on a bank's financial stability and resilience. Idiosyncratic risks can arise from a variety of sources, including a bank's business model, management, and operations.
Internal Capital Adequacy Assessment Process refers to the process by which a ba… #
Internal capital adequacy assessment process is a critical component of bank risk management, as it helps to ensure that a bank has sufficient capital to absorb potential losses and maintain financial stability. The process involves a thorough assessment of a bank's risk profile, including its credit risk, market risk, and operational risk.
Leverage Ratio refers to the ratio of a bank's capital to its total assets, rela… #
Leverage ratio is an important consideration in stress testing and risk management, as it can have a significant impact on a bank's financial stability and resilience. A high leverage ratio can indicate that a bank is taking on too much risk and may be vulnerable to financial shocks.
Liquidity Coverage Ratio refers to the ratio of a bank's high #
quality liquid assets to its total net cash outflows over a 30-day stress period, related to liquidity and coverage ratio. Liquidity coverage ratio is an important consideration in stress testing and risk management, as it helps to ensure that a bank has sufficient liquidity to meet its short-term obligations.
Macroprudential Policy refers to the policies and measures used to mitigate syst… #
Macroprudential policy involves a range of tools and instruments, including countercyclical capital buffers, liquidity requirements, and loan-to-value ratios. The goal of macroprudential policy is to prevent the buildup of systemic risk and promote a stable and resilient financial system.
Minimum Requirement for Own Funds and Eligible Liabilities refers to the minimum… #
Minimum requirement for own funds and eligible liabilities is an important consideration in stress testing and risk management, as it helps to ensure that a bank has sufficient capital and liquidity to absorb potential losses and maintain financial stability.
Net Stable Funding Ratio refers to the ratio of a bank's available stable fundin… #
Net stable funding ratio is an important consideration in stress testing and risk management, as it helps to ensure that a bank has sufficient stable funding to meet its long-term obligations.
Operational Risk refers to the risk of loss resulting from inadequate or failed… #
Operational risk is a critical component of bank risk management, as it can have a significant impact on a bank's financial stability and resilience. Operational risks can arise from a variety of sources, including IT failures, fraud, and natural disasters.
Pillar 1 refers to the first pillar of the Basel II framework, which sets out th… #
Pillar 1 is based on a standardized approach to credit risk, market risk, and operational risk, and provides a framework for calculating a bank's regulatory capital requirements.
Pillar 2 refers to the second pillar of the Basel II framework, which sets out t… #
Pillar 2 is based on a bank's internal capital adequacy assessment process, and provides a framework for banks to evaluate their own risk profile and capital requirements.
Pillar 3 refers to the third pillar of the Basel II framework, which sets out th… #
Pillar 3 is based on the principles of transparency and accountability, and provides a framework for banks to disclose their risk management practices and capital adequacy to stakeholders.
Probability of Default refers to the likelihood that a borrower will default on… #
Probability of default is a critical component of credit risk management, as it helps to assess the likelihood of default and the potential loss that may arise.
Recovery Plan refers to the plan developed by a bank to restore its financial st… #
Recovery plan is an important consideration in stress testing and risk management, as it helps to ensure that a bank has a clear strategy for responding to financial shocks and restoring its financial stability.
Regulatory Capital refers to the minimum amount of capital that a bank must hold… #
Regulatory capital is an important consideration in stress testing and risk management, as it helps to ensure that a bank has sufficient capital to absorb potential losses and maintain financial stability.
Resolution Authority refers to the authority responsible for resolving a bank in… #
Resolution authority is an important consideration in stress testing and risk management, as it helps to ensure that a bank's failure is managed in an orderly and efficient manner.
Resolution Plan refers to the plan developed by a bank to manage its failure in… #
Resolution plan is an important consideration in stress testing and risk management, as it helps to ensure that a bank's failure does not disrupt the financial system or cause unnecessary harm to stakeholders.
Risk Appetite refers to the level of risk that a bank is willing to take on in p… #
Risk appetite is an important consideration in stress testing and risk management, as it helps to ensure that a bank is taking on risks that are consistent with its business strategy and risk profile.
Risk Management refers to the process of identifying, assessing, and mitigating… #
Risk management is a critical component of bank management, as it helps to ensure that a bank is taking on risks that are consistent with its business strategy and risk profile.
Risk Weighted Assets refer to the assets of a bank that are weighted according t… #
Risk weighted assets are an important consideration in stress testing and risk management, as they help to assess the risk profile of a bank's assets and determine its regulatory capital requirements.
Stress Testing refers to the process of evaluating a bank's ability to withstand… #
Stress testing is an important consideration in risk management, as it helps to identify potential vulnerabilities and weaknesses in a bank's risk profile and financial stability.
Systemic Risk refers to the risk that a bank's failure may have a significant im… #
Systemic risk is an important consideration in stress testing and risk management, as it helps to ensure that a bank's failure is managed in an orderly and efficient manner.
Threshold Condition refers to the conditions that must be met for a bank to be c… #
Threshold condition is an important consideration in stress testing and risk management, as it helps to identify the point at which a bank's financial stability and resilience may be compromised.
Value #
at-Risk refers to the potential loss in value of a portfolio over a specific time horizon with a given probability, related to value and risk. Value-at-risk is an important consideration in stress testing and risk management, as it helps to assess the potential loss that may arise from a bank's market risk exposures.