Principle Ia
In banking, principle Ia was a regulation of the former Federal Banking Supervisory Office , which obliged credit institutions to limit open positions in foreign exchange and precious metals in a certain ratio to liable equity . It was superseded in January 2014 by the Capital Adequacy Ordinance (CRR).
General
The German Banking Act (KWG) came into force in January 1962 and contains - even today - general clauses on the equity capital ( Section 10 KWG) and the liquidity ( Section 11 KWG) of the credit institutions. The principles I , II and III created in April 1962 as operational concretization of this KWG rules.
The closure of the Herstatt Bank on June 26, 1974, caused by the supervisory authority, was due to the problems of this bank in foreign exchange trading , which brought in losses that exceeded its equity capital by seven times, the foreign exchange trading volume reached 103 times its equity capital. The reason was, in particular, the oversized volume of so-called “open positions” in forward exchange transactions , for the limitation of which there were no regulations until then. Other German credit institutions also showed disparities in this area, but were able to continue their business operations . The banking supervisory authority quickly devised a "Principle Ia" which came into force in August 1974 and was expanded to include precious metal positions in January 1980 and market risks and interest rate risks from off-balance sheet transactions in October 1990 .
content
The aim of Principle Ia was to limit exchange rate risks , especially currency risks . These result primarily from foreign exchange and precious metal positions that have not been closed out , the so-called "open positions". An “open position” is an “open position” at credit institutions if foreign currency assets are not matched by foreign currency liabilities in the same amount, currency and due date. There is therefore a lack of congruence between certain asset and liability items in the balance sheet . Then, for example, is an active surplus currency is present, the financial institution can through appreciation of the domestic currency a rate loss suffer. The passive income generated according to an exchange loss on devaluation of its currency.
According to Principle Ia (Paragraph 1), the difference between asset and liability currency positions, regardless of their maturity , may not exceed a total of 42% of the bank's liable equity capital daily at close of business . In paragraphs 2 and 3 of Principle Ia, an additional interest rate risk was recorded for positions closed in terms of amount (closing out), taking into account the different maturities of the foreign currency positions. Foreign currency risks and precious metal price risks were limited to 21%, interest rate risks to 14% and other price risks (from futures and options transactions ) to 7% of the liable equity.
These positions were to be calculated using the value convention of the credit equivalent .
Today's regulation
The credit equivalents are now part of the off-balance sheet counterparty default risk items that are to be calculated in accordance with Art. 111 CRR in conjunction with Annex I CRR. Further regulations concern the credit valuation adjustment (Art. 381 ff. CRR).