Target CapRep

mdattilo

In the reading the Target CapRep is described as:

"Target CapReq corresponds to the 99th percentile on the loss distribution, so minCapReq is a less strict requirement. (But then we set the statutory requirement at 150% instead of 100%, so I suppose it all works out the same in the end.)"

Isn't it a 99% CTE or alternatively a 99.5% VaR? (page 4 of the MCT paper).

graham

Yes, you're right. I was a little sloppy with the wording. I've edited the OSFI.MCT wiki article make this clearer. Thanks.

flipcat

Hi @graham

While here we say Target CapReq is a CTE so Min CapReq should be a CTE/1.5, in the rest of the paper, it does not mention anything about distribution or CTE?
Does it mean that the complex formula and steps in chap 4-8 are just an estimate of Target CapReq?

Thank you!

graham

I see what you mean. If Target CapReq corresponds to a CTE of 99% then you would expect the calculation of Target CapReq to follow some kind of probabilistic reasoning using distributions related to the various risks. But the rest of the reading presents essentially an arithmetic formula, albeit a complicated one with many steps.

The second paragraph of section 1.1.1 states:

• The risk factors defined in this guideline are used to compute capital requirements at the target level. The resulting MCT capital requirements are then divided by 1.5 to derive the minimum capital requirements. The MCT ratio is expressed as the capital available over the minimum capital required.

The part that isn't discussed in this reading is how these risk factors and all the formulas were originally derived. It's this derivation where you would find the probabilistic reasoning and various distributions that would demonstrate a direct connection between the CTE of 99% and the formulas you actually use to calculate Target CapReq. (At least, that's my assumption based on the information in the reading.)