Banking Supervision

The program for this 4 module course is as follows:

Module 1:

Banking Fundamentals
• Why do we need banks
• Why do we have strict banking supervision
• What roles do banks play in the society
• Different banking business models
• Exercise: what is the business model of the bank
• Do macroeconomics matter?

The blood circulation of the Bank
• Composition of the balance sheet
• Composition of the income statement
• The connection between the balance sheet and income statement
• Exercise: how can the bank grow its business
• The blood circulation part 2: capital requirements and liquidity needs vis-à-vis the business model of the Bank
• Exercise: The blood circulation of the bank (experience the connection between balance sheet, income statement and capital base)
• Exercise: What are Bank’s financial targets and risk appetite
• The bank’s risk taxonomy: credit risk, market risk, liquidity risk, business risk, operational risk and capital adequacy risk: definitions and measures

Module 2:

• Exercise: what are the most important risks the bank is confronted with?
• Expected losses vis-à-vis unexpected losses
• What are the drivers of PDs and LGDs
• IFRS 9: loan staging
• Team discussion: The use of models in the bank, how can models support the mitigation of risk, the importance of models for capital and liquidity adequacy purposes
• How do risks potentially affect earnings, capital and liquidity of the bank
• Performance indicators: CAMELS
• Exercise: return on assets and return on equity
• Team discussion: how do models and risks impact returns?
• Team discussion: what have we learned from COVID-19? Do we have to change our models or the type of models?

Module 3:

• The importance of bank supervision
• Supervisory framework: European system of financial supervision, EBA, ECB, BCBS, national supervisors: roles and responsibilities
• The pillars of the European banking union
• SSM: From national supervision to Euro area supervision
– Financial stability (prudence) and financial integration (harmonization)
– The SSM mandate
– The SSM model: Significant institutions and less significant institutions
– Joint supervisory teams (JST) and horizontal functions
– Distribution of responsibilities
– SSM competences in the supervision of significant banks
– Classification criteria distinguishing significant and less significant entities
– JSTs embedded in the ECB hierarchy
– Key elements of the supervisory approach
– Scope of supervision
– Supervisory planning process:
– Assessment of risks for the banking industry: what are the key risks (case)
– Supervisory priorities
– Supervisory examination programme (SEP): minimum engagement levels, RAS score and banking clusters
• FinRep and CoReP
• Supervisory Review and Evaluation Process (SREP):
– Case: how would you structure this process?
– The SREP building blocks: Bank classification, monitoring of key indicators, business model assesment, governance and risk management assessment, assessment of risks to capital, assessment of risks to liquidity and funding.
• Crisis management:
– Recovery planning and assessment of recoverability, resolution planning and assessment of recoverability.
– Early interventions
– Assessment of failing or likely to fail
– Resolution (BRRB)
• On-site and off-site inspections
• Language regime
• Supervisory powers and decision making

Module 4:

• The Basel framework: pillar 1, pillar 2 and pillar 3
• Regulatory capital vis-à-vis economic capital
• Capital adequacy ratio
– Capital components
– Risk weighted exposures
– Combined buffer requirements : capital conservation, countercyclical, P2R, P2G, systemic buffer
– The importance of models
– Final version of Basel III (Basel IV) and TRIM: restricted use of internal models and the revised standardized approach
• Exercise: calculate capital requirements and actual capital ratios
• Liquidity ratios: LCR and NSFR
• The link between the Basel framework and the SREP
• Exercise: If you were a supervisor what would be your supervisory priorities