Discuss about the Extrapolative Capital Asset Pricing Model.
The paper intends to find the output of the key proposed standards. Currently the National Australian Bank applies BASEL framework in the form of risk management initiative of the organization. As of 30th September 2015, NAB has kept equity capital ratio of 10.24%. The main process of capital adequacy management framework starts from evaluating and mapping all possible sources from where the risk can hit the system. The process takes into consideration all the scenarios under which the capital norms might be stretched, it looks into all the prevailing risks and then plan for it as needed. As per the regulatory requirement the target capital ratio lies between 8.75% to 9.25% (Barberis, 2015).
The efficiency of the Australian banking system has been evaluated under two systems. The predictability of the whole system was kept at low and the outcome suggested that system was robust enough. Ongoing regulatory changes as the result of the financial crisis of 2007 and the long worldwide economic downturn that followed. This has created an overwhelming volume of market guidelines, legislation and regulations. These, in turn, are extremely complex, driving significant investment as financial institutions develop and implement their responses to complex IT, data and business requirements (Bodie, 2014).
Banks that lack adequate enterprise-level systems to manage the risk in their businesses will be under additional pressure from regulators. As the digital banking enterprise matures, regulators are inevitably going to question the core IT components that will increasingly make business decisions in lieu of human intervention. Gartner expects that regulators will both audit and, eventually, legislate smart machine usage. For example, virtual personal assistants or virtual customer service agents in the form of algorithms do not require industry certification for providing financial advice. CIOs must be prepared to challenge their business peers as to the nature and efficacy of the algorithms used in this context (Dionne, 2013). They should also be prepared to document/record all nonhuman interactions, as well as develop "fail-safe" switches in the event of operational incidents. Another option is for the CIO to be more proactive in terms of addressing the needs of risk management/compliance. For example, to ensure compliance objectives are more clearly understood, make bank systems more accessible to regulators by opening access to data, algorithms and applications to facilitate easier auditability.
Beyond the exercise of assessing operational risk from a NAB perspective, companies in many industries (including banking, insurance and securities) are seeking to measure operational risk on a quantitative basis. Some of the quantitative analysis is used to support capital calculation requirements driven by regulatory mandates, such as Basel III and Solvency II. Other quantitative analysis methods are used to develop more precise predictive models to determine the potential for certain operational risk events, such as fraud or theft.
A history of operational incidents and/or loss events can be used to inform the risk assessment process and facilitate the identification of event causes. A stock market is considered to be efficient when the market price is balanced also having an unbiased estimate of the true value of the investment.
The use of ORM solutions will help organisations improve data quality and support adequate reporting to national and international regulation authorities in order to avoid regulatory risks. Without the appropriate ORM solutions, organisations will not have adequate analysis and insight into their aggregate risk positions, or the ability to comply with new capital adequacy regulations, such as Basel III and Solvency II. It is very important to note that National Bank of Australia is one of the biggest bank in the country, however these large organisations need to comply and implement different forms or regulations to help provide efficient work in the world of business (Hasan, 2015).
Operational risks, and the related controls required to mitigate them to an acceptable level, must be documented sufficiently to satisfy a number of key stakeholders — including customers, the public, regulators, external auditors, business partners/associates and board members — as well as to provide the basis for performing a comprehensive operational risk assessment. The NAB group measures its capital adequacy so that it can support its capital management purpose that includes:
- Complying with the regulatory capital requirements
- Maintaining flexibility in order to deal with the anticipated return
- Promoting Efficiency in the amount of capital
- Credit rating in the AA range
- Efficient development of capital
Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative capital asset pricing model. Journal of Financial Economics, 115(1), pp.1-24.
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Dionne, G., Li, J. and Okou, C., 2013. An Extension of the Consuption-Based CAPM Model.
Hasan, I., Siddique, A. and Sun, X., 2015. Monitoring the “invisible” hand of market discipline: Capital adequacy revisited. Journal of Banking & Finance, 50, pp.475-492.