BFF2401 Lecture Notes - Lecture 10: Historical Cost, Market Risk, Basel I
Document Summary
Lecture outline: capital and insolvency risk, basel accords: the evolution of adi capital regulation, measuring adi"s capital adequacy, summary. Insolvency risk is the risk that a financial institution may not have sufficient capital to offset a sudden decline in the value of its assets relative to its liabilities. In other words, the value of the adi"s liabilities exceeds that of its assets. It is often defined for corporates as a firm being unable to fulfil its financial obligations when they come due: the first definition requires both assets and liabilities to be valued regularly. Arguments against book value accounting: tendency to defer write downs of bad loans, they can just use the historical value of the loans, they ignore bad debts, so the net worth is overstated. Losses in asset values due to adverse interest rate changes are not recognised in book value accounting method: if increase rate changes drastically, the price (asset value) drops.
