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Lessons from implementations of Basel II and for Solvency II

Lessons from implementations of Basel II and for Solvency II. Part 0: Who is QRM & cross-sectoral overview Part 1: Market risk models for the trading book of banks Part 2: Credit risk models at banks Part 3: Operational risk models at banks Part 4: Market risk models at investment funds

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Lessons from implementations of Basel II and for Solvency II

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  1. Lessons from implementations of Basel II and for Solvency II Part 0: Who is QRM & cross-sectoral overview Part 1: Market risk models for the trading book of banks Part 2: Credit risk models at banks Part 3: Operational risk models at banks Part 4: Market risk models at investment funds Part 5: Holistic models at insurers (Solvency II) Part 6: Economic capital and use test Gerhard Stahl & Stefan Jaschke, BaFin Sydney December 11, 2006 Seite 1

  2. Lessons from implementations of Basel II and for Solvency II-Who is QRM & cross-sectoral overview Sydney December 11, 2006 Seite 2

  3. BaFin as the German financial regulator • As from BaFin’s mission statement: • Preserve stability of the German financial system • Maintain confidence of investors and consumers • Safeguard fair behaviour of market participants • BaFin approach: • Integrated supervision (banking, insurance, financial services) • Risk identification and risk limitation • Prevention before punishment • Principle based (not rule based) regulation Sydney December 11, 2006 | 22.09.2014 Seite 3

  4. Cross-sectoral supervision by QRM on-site inspections of internal models: head count: about 28 in Q3/2006 Sydney December 11, 2006 | 22.09.2014 Seite 4

  5. Internal Model (IM) Auditing • Background • Regulation was almost juridical, typically off-site supervision, before 1997 • Development of internal auditing expertise at BaFin and Deutsche Bundesbank since 1996 • Institutions may use suitable internal risk models for determining the capital charges or partial capital charges for the market risk since 1997, provided that BaFin has confirmed their suitability in writing upon the institution's request (“Principle I concerning the capital of institutions” ) Sydney December 11, 2006 | 22.09.2014 Seite 5

  6. Lessons from IM Audits for Basel II • Stochastic modelling and regulation • Non-linear instruments, complex hedging strategies • Large-scale forecasting models with thousands of variables • Portfolio view of risk • Are multivariate non-linear stochastic models complex? • No! – the complexity comes from the interdisciplinary use of VaR-Models Sydney December 11, 2006 | 22.09.2014 Seite 6

  7. Investment funds, banks, insurers complexity of products re-insurers derivates houses hedge funds insurers banks funds complexity of risk drivers Sydney December 11, 2006 | 22.09.2014 Seite 7

  8. Similarities and Differences Sydney December 11, 2006 | 22.09.2014 Seite 8

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