FM 9528 - Banking Analytics Coursework 1 1 Coursework 1 - Banking Regulation This coursework is focused on a critical analysis of the current status of the Basel proposal and on measuring your ability to estimate capital requirements for a set of operations. Use the Basel III agreement implementation document in Canada, the BCBS consulting documents, citable sources from journals and companies, official publications (see http://bit.ly/2ksdoNM), and your knowledge from the course to answer each of the following questions. The answers should be in your own words in a way a non-expert can understand, but everything should be properly cited and discussed. Focus on explaining what you did to arrive to your results. Marks will be deducted for just quoting verbatim from any citable source, for not discussing how you arrive at a certain quantity, or for discussing concepts with no adequate citable source. You must prove you are able to create an argument supported by literature, contrasting multiple literary views when necessary. 1. (50%) The file “Dataset.xlsx” shows the total bond portfolio of a small bank in Ontario and the yield curves for the Canadian Sovereigns for the last 20 years. We will focus in this exercise only on the corporate and sovereign bond market. The bank has been categorized by the OSFI so that it must keep a capital adequacy requirement of 11.5% of its Risk- Weighted Assets. With this information, and assuming the bank does not have any other operations: a. (20%) Using the yield curve at the purchasing date of the bond, calculate the spread the bank used to obtain the bond price. b. (10%) Use the previously calculated spread, the yield curve at August 26th, 2020, and the information of the bonds to price them, so they reflect the current market price for the purposes of capital requirement calculations. Compare the original price with August 26th price. What can you say about the risk-free rates and bond prices? c. (20%) Calculate the total provisions and capital requirement each operation brings using the prices you just calculated. Report the total provision for the business line and the total capital requirement for that business line. For LGD in corporate, assume the standard Basel weights (i.e. use foundational approach). The rating table for the bank given its spread quartile is as follows: Spread quartile PD Rating Lower 5% 0.001 AAA 5% - 20% AA 20% - 40% A 40% - 60% BBB 60% - 75% BB 75% - 90% B Upper 10% CCC N/A D Identify the bounds for the spread for each segment and present it in a table. The Basel III floors for PD and LGD apply. FM 9528 - Banking Analytics Coursework 1 2 2. (40%) In July 2020, the BCBS published the “18th progress report on adoption of the Basel regulatory framework”1, comparing the status of the implementation of the different regulation in Basel III across all economies that have subscribed the agreement. Using the spreadsheet available2, choose a pair of countries marking them with your student number. Each pair can only be used once. If your preferred selection is already marked, please choose another one. For the selected pair of countries, discuss the following questions: a. (20%) What is the general status of the implementation of Basel III Capital3 in those territories? Shortly define each element, summarize the main differences between the implementation levels when they exist. Present an overall discussion of why these differences may have occurred, focusing on the comparative strengths and weaknesses of each country. Be specific about both the reality of each territory, researching its internal situation and citing proper references4. b. (20%) Select one piece of regulation within the Capital regulatory framework of the regulation showing is a significant difference between the territories (two points or more!). This can be any of the ones defined in part a. For your selected piece, discuss and evaluate the advantages and challenges that the less-developed territory will face to successfully implement it. Evaluate in your own words the likelihood of successful implementation, contrasting multiple literature sources to sustain your analysis. The remaining 10% of the coursework corresponds to the format and language sections (see rubric). Conditions of the coursework Software: You must use Python to run the numerical calculations over your portfolio. A copy of your Jupyter notebook must be attached to the coursework as an appendix in readable format, and a link to the notebook must also be included. Instructions how to export to PDF can be found here: https://stackoverflow.com/questions/52588552/google-co-laboratory-notebook-pdf-download . The notebook text MUST be machine readable (so no screenshots of the notebook please) otherwise a 25% discount will apply. Word Limit: 1500 words +/-10% either side of the word count is deemed to be acceptable. Any text that exceeds an additional 10% will not attract any marks. The relevant word count includes items such as cover page, executive summary, title page, table of contents, tables, figures, in-text citations and section headings, if used. The relevant word count excludes your list of references and any appendices at the end of your coursework submission. 1 The regulation can be accessed here https://www.bis.org/bcbs/publ/d506.htm. 2 https://uwoca- my.sharepoint.com/:x:/g/personal/cbravoro_uwo_ca/EQVv4txuQaVLpLkOASOP95QBrLfMYC0ON_67VrXmcz kWTg?e=ufC9CD 3 Focus only on the capital regulations, ignore the segments that fall upon Leverage, SIB, IRRB, Liquidity, etc. 4 Use the APA citation format. FM 9528 - Banking Analytics Coursework 1 3 You should always include the word count (from Microsoft Word, not Turnitin), at the end of your coursework submission, before your list of references. Title/Cover Page: You must include a title/ cover page that includes: your Student ID, Course Code, Assignment Title, Word Count. This assignment will be marked anonymously, please ensure that your name does not appear on any part of your assignment. Submission Deadline: October 14th, 23:55. Turnitin Submission: The assignment MUST be submitted electronically via OWL. All required papers may be subject to submission for textual similarity review to the commercial plagiarism detection software under license to the University for the detection of plagiarism. All papers submitted for such checking will be included as source documents in the reference database for the purpose of detecting plagiarism of papers subsequently submitted to the system. Use of the service is subject to the licensing agreement, currently between The University of Western Ontario and Turnitin.com (http://www.turnitin.com).
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