Risk and Compliance - Key terms and definitions
The following are some of the most important terms and definitions that you might across in the Risk and Compliance profession.
Basel II
A revision of the original Basel Accord (Basel Committee on Banking Supervision, 1988), these regulations are to be implemented via the Capital Requirements Directive (CRD).
Basel II is divided into four composite parts consisting of:
- Greater risk sensitivity to risk weightings against credit risk
- Introduction of internal ratings based (IRB) approach
- Incentives for risk management improvements
- Overall capital of banks unchanged
Capital Adequacy Directive (CAD)
This refers to the capital adequacy of investment firms and credit institutions.
Markets in Financial Instruments Directive (MiFID)
This is a European Union (EU) directive incorporating organisational requirements and operating conditions for investment firms.
Sarbanes Oxley
These are compliance/investor protection and listing regulations that were introduced in the United States post-Enron.
The costs of implementation for US companies are estimated at $4m a year and this is one of the major reasons as to why international firms are reluctant to list on NASDAQ or the NYSE.
'Value at Risk' (VAR)
Risk models that formulate the adequate equity capital necessary to cover potential losses. The latter can result from operational risk in banking organizations, for example human and system process failures.
