Summary

In this chapter, we learned the basic principles of the Basel Accords, the capital adequacy requirements in banking regulation, the risk measures and different risk types, and most importantly, the powerful tools of R used in risk management.

We saw that the Basel Accords are a world wide harmonized banking regulatory framework, and we learned the ongoing development and more sophisticated approaches of the financial regulations. Furthermore, we provided insights on risk measures, starting from the most simple standard deviation of returns to the more sophisticated ones, most importantly, Value at Risk (VaR). However, we saw that VaR is not necessarily a coherent risk measure, but it is still one of the most widely used figures in both regulation and risk management.

We went through the main risk types a bank or financial institution faces, that is, the credit risk, the market risk, and the operational risk. You can see how the different risk management approaches can be used to calculate...