What is CET1 and what counts?
The banks true core equity, meaning money that can immediately absorb losses if the bank gets into trouble.
eg. common shares, retained earnings.
CET1=common shares + retained profits
Typical Basel risk weights:
Cash?
Govt securities?
Residential mortgages?
Corporate/commercial loans?
Cash? 0%
Govt securities? 0%
Residential mortgages? 50%
Corporate/commercial loans? 100%
Leverage Ratio
Tier 1 Capital / Total Assets
Tier 1 vs Tier 2 capital
T1:
common shares
retained earnings
disclosed reserves
T2:
subordinated debt
Basel 3 rules for a well capitalized bank
CET1 ≥ 6.5%
Tier 1 ≥ 8%
Total Capital ≥ 10%
Leverage Ratio ≥ 5%
Money multiplier equation
m = (1+c) / (c+rr+er)
Microhedging vs Macrohedging
Microhedging - employs a future contract to hedge a particular asset or liabilty risk
Macrohedging - uses futures or other derivatives to hedge entire balance sheet duration gap
Impact of a $100 cash withdrawal on non bank public
Currency +100
Checkable deposits -100
Impact of a $100 cash withdrawal on central bank
Currency in circulation +100
Bank reserves -100
(both are liabilities)
Impact of a $100 cash withdrawal on banking system
Reserves (asset) -100
Checkable deposits (liability) -100
CGAP=
RSA-RSL
ΔNet interest income=
CGAP x Δr
Gap ratio=
CGAP/Assets
Financing gap=
Average loans - average deposits
Financing requirement=
Financing gap + liquid assets
Total available sources of liquidity
Sell securities
Borrow
Excess cash reserves
Current total uses of liquidity
Money that has already been borrowed
Modified duration
D / 1+r
Price volatility
MD x potential adverse move in yield
DEAR
Dollar value of position x PV
Dollar value of position
Value / (1+r)^t
