I have gone through many of your videos and am so impressed. I work in a banks's IT department but working with highligh complex types of business lines and risk mangement areas. You made all the concepts I have been struggling with so easily understood (amazing video on repo). One question though --- why are the derivatives consider part of the off balance sheet? I always accpted it as the fact but just curious.
Thank you for your simplified and clear explanation. Does this calculation applies to banks in Europe. I want to know if the same approach is used by Italian banks.
@jeremyj2e the point is the *stylized* example is to emphasis that off-BS assets do contribute to RWA, not to size them realistically (obviously). I didn't drill down to intangibles (obviously). Liabilities at 6x equity is not misleading: it's a bank, they are leveraged. But thank you for the useless nitpicks
it's tempting to treat provision or loan loss reserve as asset whereas it in fact is a way of absorbing a loss, a way of financing, just like equity. it's a form of capital. it's not a part of the assets of a bank.
yes, thank you for the reply. I understand, whatever form it is in, as long as it's effectively a way of "financing", it should be accounted/treated as capital, just like equity.
Are you sure you know what you're talking about?! 1. RWA cannot be more than 100% of assets - with cash and certain govies around 0%. 2. Your definition of Tier 1 Capital is kind of fishy - you need to back out goodwill. 3. Or are you talking about Tier 1 Common (seems like you use them interchangeably) - then back out preferred and goodwill, otherwise it's incorrect.
