@@MikFrey No! If a bank cannot serve its debt, they go bankrupt. However, there is no paying obligation to equity holders, so equity won't cause bankruptcy.
I am a bit confused..isn't Pillar 1: Minimum Capital Requirements and Pillar 2: Supervisory Review and Evaluation Process? Where is the Economic v Regulatory pillars from? Thanks in advance for the clarification.
Thank you for such a poignant post. Considering the current Basel 3 proposed legislation. And the populist rhetoric ads, attacking it as big government, costly overreach, by US Financial trade groups. Without even mentioning what the actual legislation is about. So thanks for the clarification.
Is the BASEL accord really talking about that equity in Pillar-1? Shares bought in some other company? I think it is the equity capital, i.e., the paid-up capital + tier-2 assets, which times 8% needs to be larger than the risk a bank is exposed to.
I understand why banks need to calculate their risks based on the pillar 1 approach (holding more equity then 8%*RWA in order to be able to survive more likely in worst cases). However, I don’t quite understand why banks need to calculate the risks based on pillar 2 approach. What do they do with the final RWA within pillar2? Thank you in advance and very very good videos and explanations!
There is a requirement to meet BOTH, pillar 1 and pillar 2 requirements. most banks (at least in Germany) are shorter on the pillar two capital requirement. The idea is that pillar 1 capital is more comparable across banks, but pillar 2 capital is more specific to the unique business model (that is what I was trying to do in the end of the video)
That makes sense. I was just wondering the following: Let's say a bank calculated its total RWA (pillar 1) of 25 mln € and their total RWA (based on pillar 2) of 20 mln €. Does the bank need to have 25 mln € (= max(20, 25)) or even 45 mln € (=20+25)? So I understand that the pillar 2 RWA is more specific to the bank but my question was more about what do they do with the RWA value of pillar 2. 🙂
No - AIRB is one approach that can be taken within the economic method. However the economic method is a wider term and does not only apply to create risk (see my video on credit risk, I talk a bit about the IRB approach there)
