In the "fully stressed" simulation featured in the IRA Bank Monitor, some of the largest US banks are shown to need Economic Capital ("EC"), a Basel II term meant to describe the amount of capital required to cover the risks taken by a financial institution, well in excess of current Tier One Risk Based Capital ("RBC").
As with previous reports, IRA employs a test methodology that sets a very high hurdle in terms of measuring risk-based capital adequacy for safety and soudness purposes. IRA deliberately selected an EC simulation that is the opposite of that employed in the Quantitative Impact Survey IV conducted by US regulators during 2005, which essentially asked banks to define their minimum capital needs. By emphasizing the trading book risk on the balance sheets of the largest US banks, the IRA Basel II simulation illustrates the wide differences in business models among US financial institutions. By contrast, most smaller US banks require EC below their Tier One RBC.
Specifically, the IRA Bank Monitor Basel II simulation poses a key question: How much Economic Capital does a given banking organization need in order to sustain severe losses on its risk bearing trading book but keep its external credit ratings stable? A ratio > 1 indicates that the bank needs greater EC than current RBC, suggesting a more risky business model. A ratio of < 1 indicates that the bank requires less EC than current RBC, suggesting a less risky business model.
The IRA Bank Monitor is a unique performance and risk model of all FDIC insured depository institutions, including a variety of financial tests, Basel II credit ratings and risk metrics. IRA is currently the only organization publishing apples-to-apples Economic Capital and Risk Adjusted Return On economic Capital (RAROC) risk management benchmarks comparable across all 8,900+ bank units and 900+ bank holding companies registered with the FDIC. Subscribers to the IRA Bank Monitor have access to almost two decades of bank data and metrics, which they may use via the Web or in customized SQL installations. The IRA Bank Monitor is available online worldwide in both unlimited use institutional subscription form as well as via âa la carteâ single report formats.