The rules in Pillar I can be viewed as uniform rules capturing the risks of an average bank. The more customised risk adjustments are captured in
Pillar II. Pillar I contains rules on estimating three important types of risk:
- Credit risk
- Market risk
- Operational risk
Pillar I also sets the minimum requirement for regulatory capital.
The following figure gives an overview of the different models which can be used for estimating the three risk types. The figure also shows that the minimum capital requirement is unchanged from the current capital adequacy rules. The regulator can, under Pillar II, require banks to hold more capital than the minimum level.
The risk-weighted assets for credit risk, market risk and operational risk should be aggregated in the total risk-weighted items measure. So far it is not possible in Denmark to account for correlation between the various risk types when aggregating the three numbers. This is in line with the recommendations from the UK FSA for not adjusting for the correlation between the various risk types.
The different risk types and models are described further below. A general description is followed by a presentation of the models Danske Bank has chosen.