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Commercial Banking
Risk Management
Regulation in the Wake of the Financial Crisis

Edited by
Weidong Tian
Commercial Banking Risk Management
 Weidong Tian
Editor

Commercial Banking
Risk Management
Regulation in the Wake of the Financial Crisis
Editor
Weidong Tian
University of North Carolina at Charlotte
Charlotte, North Carolina, USA

ISBN 978-1-137-59441-9    ISBN 978-1-137-59442-6 (eBook)

DOI 10.1057/978-1-137-59442-6

Library of Congress Control Number: 2016961076

© The Editor(s) (if applicable) and The Author(s) 2017

This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the pub-
lisher nor the authors or the editors give a warranty, express or implied, with respect to the
material contained herein or for any errors or omissions that may have been made.

Cover image © PM Images / Getty

Printed on acid-free paper

This Palgrave Macmillan imprint is published by Springer Nature

The registered company is Nature America Inc. New York
The registered company address is: 1 New York Plaza, New York, NY 10004, U.S.A.
 Preface

One of the most important lessons from the financial crisis of 2007–2008
is that the regulatory supervision of financial institutions, in particular
commercial banks, needs a major overhaul. Many regulatory changes have
been implemented in the financial market all over the world. For instance,
the Dodd-Frank Act has been signed into federal law on July 2010; the
Basel Committee has moved to strengthen bank regulations with Basel
III from 2009; the Financial Stability Board created after the crisis has
imposed frameworks for the identification of systemic risk in the financial
sector across the world; and the Volcker Rule has been adopted formally by
financial regulators to curb risk-taking by US commercial banks. Financial
institutions have to manage all kinds of risk under stringent regulatory
pressure and have entered a virtually new era of risk management.
This book is designed to provide a comprehensive coverage of all impor-
tant modern commercial banking risk management topics under the new
regulatory requirements, including market risk, counterparty credit risk,
liquidity risk, operational risk, fair lending risk, model risk, stress tests,
and comprehensive capital analysis and review (CCAR) from a practical
perspective. It covers major components in enterprise risk management
and a modern capital requirement framework. Each chapter is written by
an authority on the relevant subject. All contributors have extensive indus-
try experience and are actively engaged in the largest commercial banks,
major consulting firms, auditing firms, regulatory agencies and universi-
ties; many of them also have PhDs and have written monographs and
articles on related topics.

v
vi PREFACE

The book falls into eight parts. In Part 1, two chapters discuss regu-
latory capital and market risk. Specifically, chapter “Regulatory Capital
Requirement in BASEL III” provides a comprehensive explanation of the
regulatory capital requirement in Basel III for commercial banks and global
systemically important banks. It also covers the current stage of Basel III
and the motivations. Chapter “Market Risk Modeling Framework Under
Basel” explains the market risk modeling framework under Basel 2.5 and
Basel III. The key ingredients are explained and advanced risk measures
on the market risk management are introduced in this chapter. The latest
capital requirement for the market risk is also briefly documented.
Part 2 focuses on credit risk management, in particular, counter-
party credit risk management. Chapter “IMM Approach for Managing
Counterparty Credit Risk” first describes the methodologies that have
been recognized as standard approaches to tackle counterparty credit
risk and, then uses case studies to show how the methodologies are cur-
rently used for measuring and mitigating counterparty risk at major com-
mercial banks. In the wake of the 2007–2008 financial crisis, one recent
challenge in practice is to implement a series of valuation adjustments in
the credit market. For this purpose, chapter “XVA in the Wake of the
Financial Crisis” presents major insights on several versions of valuation
adjustment of credit risks—XVAs, including credit valuation adjustment
(“CVA”), debt valuation adjustment (“DVA”), funding valuation adjust-
ment (“FVA”), capital valuation adjustment (“KVA”), and margin valua-
tion adjustment (“MVA”).
There are three chapters in Part 3. The three chapters each discuss three
highly significant areas of risk that are crucial components of the modern
regulatory risk management framework. Chapter “Liquidity Risk” docu-
ments in detail modern liquidity risk management. It introduces both
current approaches and presents some forward-looking perspectives on
liquidity risk. After the 2007-2008 financial crisis, the significant role of
operational risk has been recognized and operational risk management has
emerged as an essential factor in capital stress testing. A modern approach
to operational risk management is demonstrated in chapter “Operational
Risk Management”, in which both the methodology and several exam-
ples of modern operational risk management are discussed. Chapter “Fair
Lending Monitoring Models” addresses another key risk management
area in commercial banking: fair lending risk. This chapter underscores
some of the quantitative challenges in detecting and measuring fair lend-
ing risk and presents a modeling approach to it.
 PREFACE vii

Part 4 covers model risk management. Built on two well-examined

case studies, chapter “Caveat Numerus: How Business Leaders Can Make
Quantitative Models More Useful” explains how significant model risk
could be, and it presents a robust framework that allows business lead-
ers and model developers to understand model risk and improve quan-
titative analytics. By contrast, chapter “Model Risk Management Under
the Current Environment” provides an extensive discussion about model
risk management. In this chapter, model risk management is fully doc-
umented, including the methodology, framework, and its management
organizational structure. The current challenges frequently encountered
in practice and some approaches to address these model risk issues are also
presented.
The two chapters in Part 5 concentrate on a major component of the
Dodd-Frank Act and Comprehensive Capital Analysis Review (CCAR)-
capital stress testing- for commercial banks. Chapter “Region and Sector
Effects in Stress Testing of Commercial Loan Portfolio” introduces a gen-
eral modeling approach to perform capital stress testing and CCAR in a
macroeconomic framework for a large portfolio. Chapter “Estimating the
Impact of Model Limitations in Capital Stress Testing” discusses model
limitation issues in capital stress testing and presents a “bottom-up”
approach to uncertainty modeling and computing the model limitation
buffer.
After a detailed discussion on each risk subject in corresponding chap-
ter, Part 6 next introduces modern risk management tools. Chapter
“Quantitative Risk Management Tools for Practitioners” presents a com-
prehensive introduction to quantitative risk management techniques
which are heavily employed at commercial banks to satisfy regulatory cap-
ital requirements and to internally manage risks. Chapter “Modern Risk
Management Tools and Applications” offers an alternative and comple-
mentary approach by selecting a set of risk management tools to demon-
strate the approaches, methodologies, and usages in several standard risk
management problems.
Part 7 addresses another recently emerging important risk manage-
ment issue: data and data technology in risk management. Commercial
banks and financial firms have paid close attention to risk and regula-
tory challenges by improving the use of databases and reporting tech-
nology. A widely accepted recent technological solution, Governance,
Risk, and Compliance ("GRC"), is explained in greater depth in the two
chapters in Part 7. Chapter “GRC Technology Introduction” introduces
viii PREFACE

GRC ­technology–motivation, principle and framework; chapter “GRC

Technology Fundamentals” explains use cases in GRC technology and its
fundamentals. Both chapters “GRC Technology Introduction” and “GRC
Technology Fundamentals” together provide a comprehensive introduc-
tion on the data technology issues regarding many components of risk,
including operational risk, fair lending risk, model risk, and systemic risk.
Finally, in the last chapter, chapter “Quantitative Finance in the Post
Crisis Financial Environment” (Part 8), current challenges and directions
for future commercial banking risk management are outlined. It includes
many of the topics covered in previous chapters, for instance, XVAs, oper-
ational risk management, fair lending risk management, and model risk
management. It also includes topics such as risk of financial crimes, which
can be addressed using some of the risk management tools explained in
the previous chapters. The list of challenges and future directions is by
no means complete; nonetheless, the risk management methodology and
appropriate details are presented in this chapter to illustrate these vitally
important points and show how fruitful such commercial banking risk
management topics could be in the coming times.
Weidong Tian, PhD
Editor
 Acknowledgments

I would like to extend my deep appreciation to the contributors of this

book: Maia Berkane (Wells Fargo & Co), John Carpenter (Bank of
America), Roy E. DeMeo (Wells Fargo & Co), Douglas T. Gardner (Bank
of the West and BNP Paribas), Jeffrey R. Gerlach (Federal Reserve of
Richmond), Larry Li (JP Morgan Chase), James B. Oldroyd (Brigham
Young University), Kevin D. Oden (Wells Fargo & Co), Valeriu (Adi)
Omer (Bank of the West), Todd Pleune (Protiviti), Jeff Recor (Grant
Thornton), Brain A. Todd (Bank of the West), Hong Xu (AIG), Dong
(Tony) Yang (KPMG), Yimin Yang (Protiviti), Han Zhang (Wells Fargo
& Co), Deming Zhuang (Citigroup) and Steve Zhu (Bank of America).
Many authors have presented in the Mathematical Finance Seminar series
of University of North Carolina at Charlotte, and the origins of this book
were motivated by organizing these well-designed and insightful presen-
tations. Therefore, I would also like to thank the other seminar speak-
ers including Catherine Li (Bank of America), Ivan Marcotte (Bank of
America), Randy Miller (Bank of America), Mark J. Nowakowski (KPMG),
Brayan Porter (Bank of America), Lee Slonimsky (Ocean Partners LP)
and Mathew Verdouw (Market Analyst Software), and Stephen D. Young
(Wells Fargo & Co).
Many thanks are due to friends and my colleagues at the University of
North Carolina at Charlotte. I am particularly indebted to the following
individuals: Phelim Boyle, Richard Buttimer, Steven Clark, John Gandar,
Houben Huang, Tao-Hsien Dolly King, Christopher M. Kirby, David Li,
David Mauer, Steven Ott, C. William Sealey, Jiang Wang, Tan Wang and

ix
x ACKNOWLEDGMENTS

Hong Yan. Special thanks go to Junya Jiang, Shuangshuang Ji, and Ivanov
Katerina for their excellent editorial support.
I owe a debt of gratitude to the staff at Palgrave Macmillan for edi-
torial support. Editor Sarah Lawrence and Editorial Assistant Allison
Neuburger deserve my sincerest thanks for their encouragement, sugges-
tions, patience, and other assistance, which have brought this project to
completion.
Most of all, I express the deepest gratitude to my wife, Maggie, and our
daughter, Michele, for their love and patience.
 Contents

Part I Regulatory Capital and Market Risk1

Regulatory Capital Requirement in Basel III3

Weidong Tian

Market Risk Modeling Framework Under Basel35

Han Zhang

Part II Counterparty Credit Risk53

IMM Approach for Managing Counterparty Credit Risk55

Demin Zhuang

XVA in the Wake of the Financial Crisis75

John Carpenter

xi
xii CONTENTS

Part III Liquidity Risk, Operational Risk and Fair

Lending Risk101

Liquidity Risk103
Larry Li

Operational Risk Management121

Todd Pleune

Fair Lending Monitoring Models135

Maia Berkane

Part IV Model Risk Management151

Caveat Numerus: How Business Leaders Can

Make Quantitative Models More Useful153
Jeffrey R. Gerlach and James B. Oldroyd

Model Risk Management Under the Current Environment169

Dong (Tony) Yang

Part V CCAR and Stress Testing199

Region and Sector Effects in Stress Testing

of Commercial Loan Portfolio201
Steven H. Zhu

Estimating the Impact of Model Limitations

in Capital Stress Testing231
Brian A. Todd, Douglas T. Gardner, and Valeriu (Adi) Omer
 CONTENTS xiii

Part VI Modern Risk Management Tools251

Quantitative Risk Management Tools for Practitioners253

Roy E. DeMeo

Modern Risk Management Tools and Applications281

Yimin Yang

Part VII Risk Management and Technology303

GRC Technology Introduction305

Jeff Recor and Hong Xu

GRC Technology Fundamentals333

Jeff Recor and Hong Xu

Part VIII Risk Management: Challenge

and Future Directions393

Quantitative Finance in the Post Crisis Financial

Environment395
Kevin D. Oden

Index419
 List of Figures

Fig. 1 Capitals, capital ratios, and leverage ratios in Basel III 30

Fig. 1 Three components in counterparty risk management
framework62
Fig. 2 Market factors for backtesting 68
Fig. 3 An example of backtesting 68
Fig. 4 Another example of backtesting 69
Fig. 5 Illustration of simulated interest rates in the future dates 70
Fig. 6 Prices of the portfolio under the similated scenarios 70
Fig. 7 Positive exposure of the portfolio under the simulated
scenarios71
Fig. 8 The expected exposure profile over five years 72
Fig. 9 EPE and PFE of 97.7 percentile 72
Fig. 1 EPE profile for EUR-USD Cross-currency swap and USD
interest rate swap 81
Fig. 2 Funding flows for uncollateralized derivative assets 91
Fig. 3 Dealer 1’s received fixed trade flows at execution 97
Fig. 4 Dealer 1’s received fixed trade flows after
(mandatory) clearing 98
Fig. 1 Overlap in Firmwide Coverage 108
Fig. 2 Decision tree 112
Fig. 3 Operational balance 114
Fig. 4 Business needs break-up 115
Fig. 1 Aggregate loss distribution 129
Fig. 1 Histogram of Treatment Effect for Different
Matching Methods 146

xv
xvi LIST OF FIGURES

Fig. 1 This figure shows the delinquency rate on single-family

mortgages and the 10-year Treasury constant maturity rate.
Note that the delinquency rate increased sharply during
the financial crisis of 2008 even as the Treasury rate continued
to decrease, a pattern not consistent with the assumptions
of the GRE model 162
Fig. 1 A typical MRM organizational structure 174
Fig. 2 MRM framework 181
Fig. 3 Model development, implementation and use 183
Fig. 4 Model validation structure 187
Fig. 1 Partitioning of rating transition matrix 206
Fig. 2 Quarterly iteration of estimating credit index Z from default
and transition matrix 208
Fig. 3 Historical default rate versus credit index 209
Fig. 4 Rho (ρ) and MLE curve as function of (ρ) for selected
industry sector 212
Fig. 5 Lead-Lag Relationship between credit index
and GDP growth 214
Fig. 6 2013 CCAR scenarios for USA and Europe GDP growth 215
Fig. 7 Credit index for North America (NA) under 2013
CCAR SAdv 217
Fig. 8 Stress PDs by region and sector across the rating grades 219
Fig. 9 Historical downturn PDs compare with CCAR
one year stress PDs 222
Fig. 10 Historical downturn PDs compare with CCAR
two year stress PDs 223
Fig. 11 Loan loss calculations for first year and second year 225
Fig. 12 2012 CCAR loan loss across 18 banks 226
Fig. 1 Illustrative example of model developed to forecast
quarterly revenue for a corporate bond brokerage
(a) Candidate independent variables are the spread
between the yields on the BBB corporate debt and the
10Y US Treasury (BBB; blue line) and the Market Volatility
Index (VIX; tan line) (b). Historical data are solid lines
and 2015 CCAR severely adverse scenario forecasts
are dashed lines. The VIX is chosen as the independent
variable in the Model and the BBB is used as the
independent variable in the Alt. model 234
 List of Figures  xvii

Fig. 2 Estimating the impact of residual error. The model

forecasts quarterly revenue (a) However, it is the error
in the nine-quarter cumulative revenue that is most
directly related to capital uncertainty (b) The distribution
of nine-quarter cumulative errors indicates the expected
forecast uncertainty due to residual model error (c)236
Fig. 3 Estimating the impact of ambiguity in model selection.
The performance of the Model (tan) and the Alt.
Model (blue) in the development sample are similar
(solid lines) (a). The forecasts (dotted lines) are, however,
significantly different. The nine-quarter cumulative revenue
forecast for the Model (tan dot in (b)) is $45 million greater
than the Alt. Model (blue dot in (b))239
Fig. 1 GRC Vendor Domain Capabilities 313
Fig. 1 Typical GRC Use Cases 334
Fig. 2 Example Cyber Security Standard & Regulations Timeline 344
Fig. 3 Example GRC Framework 365
Fig. 4 Example of an Integrated Control Library 368
Fig. 5 Example GRC Integrated Architecture 386
 List of Tables

Table 1 Interval default probabilities and EPE profiles 82

Table 1 Treatment Effect By Strata of Propensity Score 145
Table 2 Treatment Effect for Difference Matching Methods 145
Table 3 Sensitivity Analysis 146
Table 1 S&P historical average transition matrix over 30 years
(1981–2011)204
Table 2 Conditional transition matrix (Z = +1.5 and Z = −1.5) 210
Table 3 Stress transition matrix by region projected
for Year 1 and Year 2 220
Table 4 2-year transition matrices by selected regions
and industry sectors 221
Table 1 Average annual transition matrix 296
Table 2 Transition matrix at age one 297
Table 3 Transition matrix from 2012 to 2013 297
Table 4 Transition matrix from 2013 to 2014 298
Table 5 Transition matrix at age three 298
Table 6 Transition matrix from 2012 to 2014 298
Table 7 Square root transition matrix at age 1/2 299
Table 1 Example vendor scoring system 380

xix
 Contributors

Maia Berkane is a mathematical statistician with extensive experience

developing statistical methods for use in finance, psychometrics, and pub-
lic health. She taught statistics and mathematics at UCLA and Harvard
University. She has been with Wells Fargo since 2007, in asset manage-
ment, market risk analytics and, more recently, in regulatory risk manage-
ment, as the lead fair lending analytics model developer. Prior to Wells
Fargo, she was a quantitative portfolio manager at Deutsch Bank, then
Marine Capital, then Credit Suisse, building long/short equity strategies
and statistical arbitrage models for trading in the USA and Europe. She
holds a PhD in mathematical statistics from Jussieu, Paris VI, France, in
the area of extreme value theory.
John Carpenter is a senior currency and interest rate trader in the
Corporate Treasury at Bank of America in Charlotte. Prior to joining Bank
of America in 2012, he had over ten years of trading experience in
New York at Morgan Stanley, Deutsche Bank, and Citigroup across a vari-
ety of currency, interest rate, and credit products. John holds an MS in
mathematics finance from the Courant Institute at New York University
and an MS in computer science from the University of North Carolina at
Chapel Hill.
Roy DeMeo has an extensive career in finance, including several business
roles at Morgan Stanley, Nomura, Goldman Sachs, and now, Wells Fargo.
A highly respected front office modeler whose work has covered equities,
interest rate products, FX, commodities, mortgages, and CVA, he is cur-
rently a Director, Head of VaR Analytics team, at Wells Fargo, Charlotte.

xxi
xxii CONTRIBUTORS

His current responsibility includes VaR models for volatility skew, specific
risk models, and CVA models. His academic background consists of BS in
mathematics from MIT, and a PhD in mathematics from Princeton.
Douglas T. Gardner is the Head of Risk Independent Review and
Control, Americas, at BNP Paribas, and the Head of Model Risk
Management at BancWest. He leads the development and implementation
of the model risk management program at these institutions, which
includes overseeing the validation of a wide variety of models including
those used for enterprise-wide stress testing. He previously led the model
risk management function at Wells Fargo and was Director of Financial
Engineering at Algorithmics, where he led a team responsible for the
development of models used for market and counterparty risk manage-
ment. Douglas holds a PhD in Operations Research from the University
of Toronto, and was a post-doctoral fellow at the Schulich School of
Business, York University.
Jeffrey R. Gerlach is Assistant Vice President in the Quantitative
Supervision & Research (QSR) Group of the Federal Reserve Bank of
Richmond. Prior to joining the Richmond Fed as a Senior Financial
Economist in 2011, Jeff was a professor at SKK Graduate School of
Business in Seoul, South Korea, and the College of William & Mary, and
an International Faculty Fellow at MIT. He worked as a Foreign Service
Officer for the US Department of State before earning a PhD at Indiana
University in 2001.
Larry Li is an Executive Director at JP Morgan Chase covering model
risk globally across a wide range of business lines, including the corporate
and investment bank and asset management. He has around twenty years
of quantitative modeling and risk management experience, covering the
gamut of modeling activities from development to validation for both
valuation models and risk models. Larry is also an expert in market risk,
credit risk, and operational risk for the banking and asset management
industries. He has previously worked for a range of leading financial firms,
such as Ernst & Young, Ospraie, Deutsche Bank, and Constellation
Energy. Larry has a PhD in finance and a master’s degree in economics
from the University of Toronto. He has also held the GARP Financial Risk
Manager certification since 2000.
Kevin D. Oden is an executive vice president and head of Operational
Risk and Compliance within Corporate Risk. In his role, he manages
 CONTRIBUTORS xxiii

second-­line risk activities across information security, financial crimes risk,

model risk, operational risk, regulatory compliance risk, and technology
risk. He also serves on the Wells Fargo Management Committee. Prior to
this he was the Chief Market and Institutional Risk officer for Wells Fargo
& Co. and before that, he was the head of Wells Fargo Securities market
risk, leading their market risk oversight and model validation, as well as
their counterparty credit model development groups. Before joining Wells
Fargo in November 2005, he was a proprietary trader at several firms
including his own, specializing in the commodity and currency markets.
He began his finance career at Goldman Sachs in 1997, working in the risk
and commodities groups. Before moving to finance, Kevin was the
Benjamin Pierce Assistant Professor of Mathematics at Harvard University,
where he specialized in differential geometry and published in the areas of
geometry, statistics, and graph theory. Kevin holds a PhD in mathematics
from the University of California, Los Angeles and received bachelor
degrees in science and business from Cleveland State University.
James Oldroyd is an Associate Professor of Strategy at the Marriott
School of Management, Brigham Young University. He received his PhD
from the Kellogg School of Management at Northwestern University in
2007. He was an Associate Professor of Management at SKK-GSB in
Seoul, South Korea for five years and an Assistant Professor of International
Business at Ohio State University for three years. His research explores the
intersection of networks and knowledge flows. His work has been pub-
lished in outlets such as the Academy of Management Review, Organization
Science, and Harvard Business Review. He teaches courses on strategy,
organizational behavior, global leadership, leading teams, negotiations,
and global business to undergraduates, MBAs, and executives. In addi-
tion, to teaching at SKK, OSU, and BYU, he has taught at the Indian
School of Business and the University of North Carolina. He is actively
involved in delivering custom leadership training courses for numerous
companies including Samsung, Doosan, SK, Quintiles, and InsideSales.
Valeriu A. Omer is a Senior Manager in the Model Risk Management
Group at Bank of the West. His primary responsibilities consist of oversee-
ing the validation of a variety of forecasting models, including those used
for capital stress testing purposes, and strengthening the bank’s model risk
governance. Prior to his current role, he was a Risk Manager at JPMorgan
Chase. Valeriu holds a doctoral degree in economics from the University
of Minnesota.
xxiv CONTRIBUTORS

Todd Pleune is a Managing Director at Protiviti, Inc. in Chicago, Illinois.

As a leader in the model risk practice of Protiviti’s Data Management and
Advanced Analytics Solution, Todd focuses on risk modeling and model
validation for operational, market, credit, and interest rate risk. Recently,
Todd has supported stress testing model development, validation, and
internal audits at major banks. He has developed model governance pro-
cesses and risk quantification processes for the world’s largest financial
institutions and is an SME for internal audit of the model risk manage-
ment function. Todd has a PhD in corrosion modeling from the
Massachusetts Institute of Technology, where he minored in finance at the
Sloan School of Management and in nuclear physics including stochastic
modeling.
Jeff Recor is a Principal at Grant Thornton leading the Risk Technology
National Practice. For the past 25 years, Jeff has lead information security
efforts for global clients, developing regulatory compliance solutions,
information protection programs, assessment and monitoring programs,
worked with law enforcement agencies, and implemented security con-
trols. Prior to joining Grant Thornton, Jeff created and ran the GRC
Technology National Practice at Deloitte for eight years, designing techni-
cal solutions to assist clients with enterprise, operational, and information
technology risk challenges. Jeff has created several security businesses that
were sold to larger organizations, such as a security consulting company
which was sold to Nortel in 2000. He has assisted with creating informa-
tion security certification programs, supported international standards
bodies, helped establish the US Secret Service Electronic Crimes Task
Force and also the FBI Infrared program in Michigan, created university-­
level security curricula, and was chosen as the Information Assurance
Educator of the Year by the National Security Agency (NSA).
Weidong Tian is a professor of finance and distinguished professor of risk
management and insurance. Prior to coming to UNC Charlotte, Dr. Tian
served as a faculty member at the University of Waterloo and a visiting
scholar at the Sloan School of Management at MIT. His primary research
interests are asset pricing, and derivative and risk management. Dr. Tian
has published in many academic journals including Review of Financial
Studies, Management Science, Finance and Stochastics, Mathematical
Finance, Journal of Mathematical Economics, and Journal of Risk and
Insurance. He also published in Journal of Fixed Income and Journal of
Investing among others for practitioners. He held various positions in
 CONTRIBUTORS xxv

financial institutions before joining the University of Waterloo, and has

extensive consulting experience.
Brian A. Todd is a Model Validation Consultant for Bank of the West
and the lead developer of the BancWest model limitation buffer used in
BancWest's successful 2016 CCAR submission. His other work includes
validation of Treasury ALM, Capital Markets, and PPNR models at Bank
of the West, BancWest, and BNP Paribas, U.S.A. Inc. Brian was formerly
an Assistant Professor of Physics at Purdue University where he led a
research group working on exotic diffusion-reaction processes in biologi-
cal systems. Brian holds a PhD in Biomedical Engineering from Case
Western Reserve University and was a post-doctoral fellow at the National
Institutes of Health in Bethesda, Maryland.
Hong Xu is the Global Head of Third Party Risk and Analytics at
AIG. He is responsible for establishing a global vendor and business part-
ner risk management strategy, process, and technology platform for
AIG. Prior to joining AIG, Hong was an SVP at Bank of America for ten
years, where he was responsible for service delivery and platform strategy,
supporting vendor risk management and strategic sourcing. He also estab-
lished a strategic center of excellence for Archer eGRC platform across the
enterprise at Bank of America to focus on Archer Solution Delivery. Prior
to Bank of America, Hong spent several years with Ariba, a business com-
merce company focused on online strategic sourcing and procurement
automation. Hong holds an MS in industrial engineering, a BS in mechan-
ical engineering, and a six-sigma black belt certification.
Dong (Tony) Yang is a Managing Director of the Risk Consulting ser-
vices at KPMG LLP, with extensive business experience in the financial
services industry. His focus is on model risk management, quantitative
finance, market and treasury risk management, and financial derivatives
and fixed-income securities valuation. Tony holds the degrees of master in
financial economics and an MBA in finance, as well as various professional
certifications, including CFA, CPA, FRM, ERP, and SAS certified advanced
programmer for SAS9.
Yimin Yang is a Senior Director at Protiviti Inc. with extensive experi-
ence in the risk management area. Prior to his current role, he headed risk
analytics teams for PNC Financial Services Group and SunTrust Banks
Inc. He holds a bachelor’s degree from Peking University and a PhD from
the University of Chicago. He also has a master’s degree in information
xxvi CONTRIBUTORS

networking from Carnegie Mellon University and a master’s degree from

the Chinese Academy of Sciences. He taught as a tenure-track assistant
professor at University of Minnesota, Morris.
Han Zhang is a Managing Director at Wells Fargo Bank and the head of
the Market Risk Analytics Group. He manages the Market Risk Analytics
team’s design and implementation as well as monitoring all major market
risk capital models (which includes the General VaR model, the debt/
equity specific risk model, the stressed VaR/specific risk model and the
incremental risk charge model), the counter party and credit risk model,
and the economical capital model. Han received his PhD from Shanghai
Jiao Tong University (China) in Materials Science, he also has three mas-
ter’s degrees in mathematics finance, computer science and mechanical
engineering.
Steven H. Zhu is a seasoned quantitative risk and capital market profes-
sional with more than twenty years of industry experience. He has worked
at Bank of America since 2003 and served in various positions within mar-
ket risk and credit risk management, responsible for market risk analysis
and stress testing, capital adequacy mandated under the US regulatory
reform act (Dodd-Frank). He formerly headed the credit analytics and
methodology team at Bank of America securities between 2003 and 2008,
responsible for developing risk methodology, credit exposure models,
counterparty risk control policy, and related processes to support credit
risk management for trading business across various product lines, includ-
ing foreign exchange, equity trading, fixed income, and securities financ-
ing. He started his career in 1993 at Citibank, New York in derivatives
research and trading and he also worked at Citibank Japan office in Tokyo
for three years, where he managed the trading book for interest rate/cur-
rency hybrid structured derivative transactions. He obtained his PhD in
applied mathematics from Brown University, an MS in operation research
from Case Western Reserve University and a BS in mathematics from
Peking University. He spent 1992–1993 in academic research as a visiting
scholar at MIT Sloan School of Management.
Deming Zhuang has been working in the financial industry since 2000.
He has worked in different areas of financial risk management, first at
Royal Bank of Canada, then at TD Bank, and currently at Citigroup.
Deming has worked on counterparty credit exposure model development
and IMM model validations. He has a PhD in applied mathematics and an
 CONTRIBUTORS xxvii

MS in computer science from Dalhousie University in Canada. Prior to

working in the financial industry, Deming held a tenured Associate
Professorship at Department of Mathematics and Comptuer Studies at
Mount Saint Vincent University from 1989 to 1998. His main research
interests were applied nonlinear analysis and numerical optimization. He
has published over 20 research papers in refereed mathematics journals.
Regulatory Capital and Market Risk
Regulatory Capital Requirement in Basel III

Weidong Tian

Introduction
The major changes from Basel II (BCBS, “International Convergence
of Capital Measurement and Capital Standards: A Revised Framework –
Comprehensive Version”, June 2006; “Enhancements to the Basel II
framework”, July 2009; “Revisions to the Basel II market risk framework”,
July 2009) to Basel III (BCBS, “Basel III: A global regulatory frame-
work for more resilient banks and banking systems”, December 2010 (rev.
June 2011); BCBS, “Basel III: International framework for liquidity risk
measurement, standards and monitoring”) are the shifts largely from risk
sensitive to capital intensive in the perspective of risk management.1 By
risk sensitive we mean that each type of risk—market risk, credit risk, and
operational risk—is being treated separately. These three types of risks are
three components of Basel II’s Pillar 1 on Regulatory capital.2 By con-
trast, a capital sensitive perspective leads to a more fundamental issue,
that of capital, and enforces stringent capital requirements to withstand
severe economic and market situations. This capital concept is extended to
be total loss-absorbing capacity (TLAC) by the Financial Stability Board
(FSB) report of November 2014, “Adequacy of Loss-absorbing Capacity

W. Tian (*)
University of North Carolina at Charlotte, Charlotte, NC, USA
e-mail: wtian1@uncc.edu

© The Author(s) 2017 3

W. Tian (ed.), Commercial Banking Risk Management,
DOI 10.1057/978-1-137-59442-6_1
4 W. TIAN

of Global Systemically Important Banks in Resolution”, to address global

significant financial institutions (G-SFI) and the financial system as a
whole.
A major reason for this shift of focus onto capital is that banks do not
have enough high quality and quantity capital bases to absorb expected
and unexpected losses under certain circumstances. When banks build up
excessive on and off balance sheet leverage, and the capital base is reduced
in a period of stress, capital buffer is required to absorb the resulting credit
loss in order to maintain their intermediation role between depositors and
investors in the real economy. Otherwise, without enough loss-absorbing
capacity, asset prices are pressured to drop in a deleveraging process, lead-
ing to massive contraction of liquidity and credit availability, as happened
in the financial crisis of 2007–2008.
A resilient banking system to prevent bank panics and contagion to the
real economy is the most important objective for regulators. Therefore, this
way of examing the risk management process leads to a modern capital
sensitive framework for commercial banks, largely documented in Basel
Committee on Banking Supervision (BCBS), the FSB, and other regula-
tors, supervisors, and national authorities in the world.
In this chapter, several main components in regulatory capital frame-
work are discussed in order.

• What is Capital?
• Why Capital is important for a bank?
• Capital requirement in Basel III.
• Capital Buffers and Capital Adequacy Framework in Basel III.
• Capital as Total Loss-Absorbing Capacity and Global Systemically
Important Banks (G-SIBs) Surcharge.

I start with the concept of capital for a bank and address other ques-
tions in the remainder of this chapter.
Roughly speaking, capital is a portion of a bank’s assets that is not
legally required to be repaid to anyone or have to be paid but only
very far in the future. By this broad definition, capital has the low-
est bankruptcy priority, the least obligation to be repaid and the most
highly liquid asset. Common equity is obviously the best capital. Besides
common equity, retained earnings and some subordinated debts with
 REGULATORY CAPITAL REQUIREMENT IN BASEL III 5

long maturity and no covenant to be redeemed (if liquid enough) are

also examples of a bank’s capital. However, we have to be very careful
to apply this concept due to its complexity.
Let us take a simple example to motivate our explanation below. A
bank has $8 million of common equity and takes $92 million of deposits;
and the bank has a $100 million of loans outstanding. The loan is on
the asset side of the bank’s balance sheet while its liability side consists
of deposits and shareholder equity. If the loans perform well, the bank is
able to fulfill obligations to the depositors and short-term investors, and
makes a profit for the shareholders. The current capital to asset value is
8% if the risk weight to the loan is 10%. If the loan is less risky and its risk
weight to the loan is assigned to be 50%, then the capital ratio (following
the calculation methodology in Basel I and Basel II) is 16%.
If some losses occurred to the loan, say, $6 million worth of loan
was not repaid, then the capital of $8 million can be used to protect the
depositors but the capital ratio reduces to 2/94 = 2.15% (assuming the
loan’s risk weight is 100%). In this case, $8 million of common equity is
a sound and solid capital buffer since it does not have to be repaid in all
circumstances, but the capital buffer drops from $8 million to $2 million.
Evidently, the $2 million of capital buffer makes the bank very fragile
against possible further loss. One way to increase the capital buffer is to
issue new equity, say $3 million for new shares. The new capital ratio is
(2+3)/(94+3) = 5.15%. But when the market situation is extremely bad, it
could be hard for the bank to issue new equity shares, or even in doing so,
the new equity share would be issued at a substantial discount; thus, the
new capital ratio is smaller than 5.15% in reality.
In another extreme eventuality, a large number of depositors withdraw
money at the same time; the bank runs into a mismatch challenge because
its asset’s maturing time is much longer than the liability’s maturity. In
our example with initial $8 million of common equity, when $5 million
is withdrawn simultaneously, the bank is enabled to use $5 million from
the capital buffer to pay to the depositor, and the capital buffer drops to
$3 million. However, if barely $10 million out of total $92 million of
deposits is withdrawn, the capital buffer is not enough to meet the deposi-
tors’ request, then the bank has to sell the less liquid asset (loan) at a big
discount. Therefore, a high quality and adequate quantity of capital base
is crucial for the bank.
6 W. TIAN

Basel II and Major Changes from Basel II

to Basel III

Basel II revises significantly the Basel Accord, so called Basel I (BCBS,

“International Convergence of Capital Measurement and Capital
Standards”, July 1988), by creating an international standard for banks
as well as regulators. It was expected to be implemented before but it has
never been fully completed because of the financial crisis of 2007–2008,
and thus the emerging of Basel III. To some extent, Basel III is merely
a revision of the Basel II framework but current regulatory risk manage-
ment businesses have been largely shifted to implement Basel III and some
other regulatory modifications on the global systemically important banks.
It is worth mentioning that each jurisdiction has its own right to make
adjustment for its domestic financial firms within the Basel III framework.
In what follows I devote myself to the capital concept in Basel II and
highlight its major revisions in Basel III. The reasons for doing so are
(1) to reflect current market reality since most banks are in the transition
period from Basel II to Basel III and there are different phase-in periods
for different capital adequacy requirements; and (2) Basel III and other
regulatory requirements are also in an ongoing process to address unre-
solved and new issues for the banking sector. Therefore, this comparison
between Basel II and Basel III not only provides a historical outlook but
also a forward-looking perspective on the capital requirement framework.
A more historical document about BCBS itself is presented in section “A
Brief History of the Capital Requirement Framework”.
There are four major changes from Basel II to Basel III, which will be
in full effect by 2023.

(1)Capital requirement

(A) A global standard and transparent definition of regular

capital. Some capitals (for instance Tier 3 and some Tier 2
capitals) in Basel II are no longer treated as capitals in
Basel III.
(B) Increased overall capital requirement. Between 2013 and
2019, the common equity Tier 1 capital increases from 2%
in Basel II of a bank’s risk-weighted assets before certain
regulatory deductions to 4.5% after such deduction in
Basel III.
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Egypt of the
Pharaohs and of the Khedivé
 This ebook is for the use of anyone anywhere in the United
States and most other parts of the world at no cost and with
almost no restrictions whatsoever. You may copy it, give it away
or re-use it under the terms of the Project Gutenberg License
included with this ebook or online at www.gutenberg.org. If you
are not located in the United States, you will have to check the
laws of the country where you are located before using this
eBook.

Title: Egypt of the Pharaohs and of the Khedivé

Author: F. Barham Zincke

Release date: October 30, 2023 [eBook #71987]

Most recently updated: November 29, 2023

Language: English

Original publication: London: Smith, Elder & Co, 1873

Credits: Susan Skinner and the Online Distributed Proofreading

Team at https://www.pgdp.net (This file was produced
from images generously made available by The
Internet Archive)

*** START OF THE PROJECT GUTENBERG EBOOK EGYPT OF

THE PHARAOHS AND OF THE KHEDIVÉ ***
 THE EXPLANATION OF THE COVER-
PLATE.

I have been given to understand that the cover-plate of this

volume needs some explanation: if so, it can now only be inserted on
an additional fly-leaf.
At the top is the familiar, winged, serpent-supported globe of the
old Egyptians. This, as every body knows, is generally found over
the main entrances of the temples, and on the heads of mummy
cases. In speaking on such subjects we must not press words too
far. But I believe it may be taken for what we may almost call a
pantheistic emblem, compounded of symbols of three of the
attributes of Deity, as then imagined. The central globe, the sun,
represents the source of light and warmth, and, therefore, of life. The
serpents represent maternity. The wings, beneath which the hen
gathers her chickens, represent protection. This is one interpretation.
There might have been, and doubtless were, contained in the
emblem other ideas, irrecoverable now by the aid of the ideas that
exist in our minds. At all events, theological emblems, like
theological terms, must vary in their import from time to time, in
accordance with the varying knowledge of those who use them: for
they can be read only by the light of what is in the mind of the reader.
This emblem, therefore, may not always have stood to the minds of
the old Egyptians for precisely the same conceptions. The above
interpretation, however, probably contained for them, for some
millenniums, its main and most obvious suggestions; suggestions
which were for those early days a profound, though easily read,
exposition of the relations of nature to man, and which are very far
from being devoid of, at all events, historical interest to the modern
traveller in Egypt.
 For the lower division of the plate, the author of the volume is
responsible. It is meant to illustrate the statement on page 15, that
the agricultural wealth of Egypt that is to say its history, results in a
great measure from the fact of its having a winter as well as a
summer harvest. The sun is represented on the right, at its winter
altitude, maturing the wheat crop, which stands for the varied
produce of the temperate zone; on the left, at its summer altitude,
maturing the cotton crop, which stands for the varied produce of the
tropical, or almost tropical, zone. Both have been grown beneath the
same Palm tree, which symbolizes the region itself. The unusually
erect Palm tree in the plate, was cut from a photographic portrait of
one which we may trust is still yielding fruit, and casting on the rock-
strewn ground the shade of its lofty tuft of wavy leaves, in the Wady
Feiran, to the north-east of Mount Sinai. The black diagonal line
gives the equator of the sky at the latitude of Cairo, which is taken,
for the purposes of the illustration, as the mean latitude of Egypt.
This is also indicated by the Pyramid.
The pathway of the sun is given as it is represented on one of the
finest and most precious monuments of old Egypt in its proudest
days—the wonderfully instructive monolithic alabaster sarcophagus
of the great Sethos, Joseph’s Pharaoh, at all events the grandfather
of the Pharaoh of the Exodus. It is now in Sir John Soane’s Museum
in Lincoln’s Inn Fields (page 138). This firmamental road way of the
great luminary (the contemporary explanation of the “firmament,” in
our English version, of the first chapter of the Pentateuch, the
“stereõma” of the Septuagint) is so sculptured on the sarcophagus,
originally it was also so coloured, as to indicate granite. The granite
—this I regret—cannot be brought out distinctly on the plate.
The beneficent action of the mysterious river, which made, and
maintains Egypt, is suggested by the three wavy lines, the old
hieroglyphic for water.
The star-sown azure, which suggests the supernal expanse, the
most glorious, and the most instructive scene the eye and the mind
of man are permitted to contemplate, is taken from the vaulted
ceiling of the temple of Sethos and Rameses at primæval This (page
100).
 How deep is the interest with which these facts and thoughts affect
the mind!

EGYPT OF THE PHARAOHS

AND OF

THE KHEDIVÉ

BY THE SAME AUTHOR.

The Duty and Discipline of Extemporary Preaching.

Second Edition.
C. Scribner & Co., New York.

A Winter in the United States:

Being Table-talk collected during a Tour through the late Southern
Confederation, the Far West, the Rocky Mountains, &c.
John Murray, London.

A Month in Switzerland.
Smith, Elder, & Co., London.
 EGYPT OF THE PHARAOHS
AND OF

THE KHEDIVÉ

BY
F. BARHAM ZINCKE
VICAR OF WHERSTEAD AND CHAPLAIN IN ORDINARY TO THE QUEEN

HUMANI NIHIL ALIENUM

SECOND EDITION, MUCH ENLARGED,

WITH A MAP

LONDON
SMITH, ELDER, & CO., 15 WATERLOO PLACE
1873

All rights reserved

 DEDICATION

To my Stepson, Francis Seymour Stevenson

I Dedicate this Book

in the hope that its perusal may some day
contribute towards disposing him to
the study of nature and of man
singly for truth’s sake
 PREFACE
TO

THE SECOND EDITION

The best return in my power for the favourable reception the

reading public, and many writers in the periodical press, have
accorded to this book, is to take care that the Edition I am now about
to issue shall be as little unworthy as I can make it of the
continuance of their favour; though, indeed, this, which they have a
right to expect, is no more than I ought to be glad to do for my own
sake.
I have, therefore, carefully revised the whole volume. In this
revision I have, without omitting, or modifying, a single statement of
fact, or of opinion, introduced as much new matter as nearly equals
in bulk a fourth of the old. These additions include a few
reminiscences of my Egyptian tour, which had not recurred to me
while engaged on the original work; but, in the main, they consist of
fuller developments of some of its more important investigations and
views.
As I find that several copies of the first edition were taken off in the
autumn, and early winter, by persons who were about to proceed to
Egypt, I have, for the convenience of any, who, for the future, may be
disposed to use the work as a travelling companion in the land of the
Pharaohs and of the Khedivé, added a map of the country and an
index: the former, I trust, will be found a good example of the
accuracy of Messrs. Johnston’s cartography.

Wherstead Vicarage: January 16, 1873.

 INTRODUCTION

Those particulars of the History of Egypt, and of its present

condition, in which it differs from other countries, are factors of the
idea this famous name stands for, which must be brought
prominently into view in any honest and useful construction of the
idea. Something of this kind is what the author of the following work
has been desirous of attempting, and so was unable, as he was also
unwilling, to pass by any point, or question, which fell within the
requirements of his design. His aim, throughout, has been to aid
those who have not studied the subject much, or perhaps at all, in
understanding what it is in the past, and in the present, that gives to
Egypt a claim on their attention. The pictures of things, and the
thoughts about them, which he offers to his readers, are the
materials with which the idea of Egypt has been built up in his own
mind: they will judge how far with, or without, reason.
The work had its origin in a tour the author made through the
country in the early months of this year. It consists, indeed, of the
thoughts that actually occurred to him at the time, and while the
objects that called them forth were still before him; with, of course,
some pruning, and, here and there, some expansion or addition.
They are presented to the reader with somewhat more of methodical
arrangement than would have been possible had the hap-hazard
sequence, in which the objects and places that suggested them were
visited, been adhered to.
As he started for Egypt at a few hours’ notice, it did not occur to
him to take any books with him. This temporary absence of the
means of reference, and verification, will, in some measure, account
for the disposition manifested throughout to follow up the trains of
thought Egyptian objects quicken in the beholder’s mind. These
excursus, however, as they will appear to those who take little
interest in the internal, and ask only for the external, incidents of
travel, have been retained, not merely because they were necessary
for what came to be the design of the work, but also because, had
they been excluded, the work would have ceased to be something
real; for then it would not have been what it professes to be, that is, a
transcript of the thoughts which the sights of Egypt actually gave rise
to in the authors mind.

Wherstead Vicarage: May 13, 1871.

 CONTENTS

CHAPTER PAGE
I. Egypt and the Nile 1
II. How in Egypt Nature affected Man 12
III. Who were the Egyptians? 25
IV. Egypt the Japan of the Old World 42
V. Backsheesh.—The Girl of Bethany 45
VI. Antiquity and Character of the Pyramid
Civilization 52
VII. Labour was Squandered on the Pyramids
because it could not be bottled up 57
VIII. The Great Pyramid looks down on the
Cataract of Philæ 70
IX. The Wooden Statue in the Boulak Museum 72
X. Date of Building with Stone 75
XI. Going to the Top of the Great Pyramid 85
XII. Luncheon at the Pyramids. Kêf 92
XIII. Abydos 97
XIV. The Faioum 105
XV. Heliopolis 117
XVI. Thebes—Luxor and Karnak 124
XVII. Thebes—The Necropolis 133
XVIII. Thebes—The Temple-Palaces 144
XIX. Rameses the Great goes forth from Egypt 154
XX. Germanicus at Thebes 164
XXI. Moses’s Wife 168
XXII. Egyptian Donkey-boys 170
XXIII. Scarabs 177
 XXIV. Egyptian Belief in a Future Life 182
XXV. Why the Hebrew Scriptures ignore the
Future Life 193
XXVI. The Effect of Eastern Travel on Belief 244
XXVII. The Historical Method of Interpretation 257
XXVIII. The Delta—Disappearance of its Monuments 266
XXIX. Post-Pharaohnic Temples in Upper Egypt 285
XXX. The Rationale of the Monuments 290
XXXI. The Wisdom of Egypt, and its Fall 299
XXXII. Egyptian Landlordism 328
XXXIII. Caste 332
XXXIV. Persistency of Custom in the East 337
XXXV. Are all Orientals Mad? 341
XXXVI. The Koran 345
XXXVII. Oriental Prayer 349
XXXVIII. Pilgrimage 355
XXXIX. Arab Superstitions.—The Evil Eye 359
XL. Oriental Cleanliness 365
XLI. Why Orientals are not Republicans 370
XLII. Polygamy—Its Cause 374
XLIII. Houriism 381
XLIV. Can anything be done for the East? 389
XLV. Achmed tried in the Balance with Hodge 396
XLVI. Water-Jars and Water-Carriers 402
XLVII. Want of Wood in Egypt, and its Consequences 405
XLVIII. Trees in Egypt 410
XLIX. Gardening in Egypt 414
L. Animal Life in Egypt.—The Camel 417
LI. The Ass.—The Horse 424
LII. The Dog.—The Unclean Animal.—The Buffalo.
—The Ox.—The Goat and the Sheep.—
Feræ Naturæ 428
LIII. Birds in Egypt 436
LIV. The Egyptian Turtle 441
 LV. Insect Plagues 443
LVI. The Shadoof 445
LVII. Alexandria 448
LVIII. Cairo 458
LIX. The Canalization of the Isthmus 472
LX. Conclusion 494

Transcriber’s Note: The map is clickable for a larger version.

EGYPT
EGYPT OF THE PHARAOHS,
AND OF
THE KHEDIVÉ.
 CHAPTER I.
EGYPT AND THE NILE.

Quodque fuit campus, vallem decursus aquarum

Fecit.—Ovid.

The history of the land of Egypt takes precedence, at all events

chronologically, of that of its people.
The Nile, unlike any other river on our globe, for more than the last
thousand miles of its course, the whole of which is through sandy
wastes—the valley of Egypt being, in fact, only the river channel—is
not joined by a single affluent. Nor, in this long reach through the
desert, does it receive any considerable accessions from storm-
water. From the beginning of its history—that is to say, for more than
five thousand years, for so far back extend the contemporary records
of its monuments—Egypt has been wondering, and, from the dawn
of intelligent inquiry in Europe, all who heard of Egypt and of the Nile
have been desiring to know what, and where, were the hidden
sources of the strange and mighty river, which alone had made
Egypt a country, and rendered it habitable.
Nowhere, in modern times, has so much interest been felt about
this earliest, and latest, problem of physical geography as in
England; and no people have contributed so much to its solution as
Englishmen. At this moment the whole of the civilised world is
concerned at the uncertainty which involves the fate of one of our
countrymen, the greatest on the long roll of our African explorers,
who has, now for some years, been lost to sight in the perplexing
interior of this fantastic continent, while engaged in the investigation
of its great and well-kept secret; but who, we are all hoping, may
soon be restored to us, bringing with him, as the fruit of his long and
difficult enterprise, its final and complete solution.[1] Thoughts of this
kind do not stand only at the threshold of a tour in Egypt, as it were,
inviting one to undertake it, but accompany one throughout it,
deepening the varied interest there is so much everywhere in
Egyptian objects to awaken.

One of the first questions to force itself on the attention of the

traveller in Egypt is—How was the valley he is passing through
formed?
This is a question that cannot be avoided. It was put to Herodotus,
more than two thousand years ago, by the peculiarities of the scene.
He answered it after his fashion, which was that of his time. It was,
he said, originally an arm of the sea, corresponding to the Arabian
Gulf, the Red Sea; and had been filled up with the mud of the Nile.
Those were days when, as was done for many a day afterwards, the
answers to physical questions were sought in metaphysical ideas.
The one to which the simple-minded, incomparable, old Chronicler
had recourse on this occasion was that of a supposed symmetrical
fitness in nature. There is the Red Sea, a long narrow gulf, a very
marked figure in the geography of the world, trending in from the
south, on the east side of the Arabian Hills. There ought therefore to
be on the west side of this range a corresponding gulf trending in
from the north: otherwise the Arabian Gulf would be unbalanced.
That compensatory gulf had been where Egypt now is. The
demonstration was complete. Egypt must have been an arm of the
sea, which had been gradually expelled by the deposit from the river.
This argument, however, is not unassailable, even from the fitness-
of-things point of view. Had the fitness-of-things been in this matter,
and in this fashion, a real agent in nature, it should have made the
valley of Egypt somewhat more like the Red Sea in width; and it
should also have interdicted its being filled up with mud. It should
have had the same reasons and power for maintaining it, which it
had originally for making it. In this way, however, did men when they
first began to look upon the marvels of Nature with inquiring interest,
suppose that metaphysical conceptions, creatures of the brain, were
entities in Nature, and would supply the keys that were to unlock her
secrets.
 ‘Egypt is the gift of the Nile.’ But I believe that it is the gift of the
Nile in a much larger sense than Herodotus had in his mind when he
wrote these words. It is the gift of the Nile in a double sense. The
Nile both cut out the valley, and also filled it up with alluvium. The
valley filled with alluvium is Egypt. The excavation of the valley was
the greater part of the work. That it was formed in this way was
suggested to me by its resemblance to the valley of the Platte above
Julesburg, as it may be seen even from a car of the Pacific Railway.
You there have a wide valley, like Egypt, perfectly flat, bounded on
either side by limestone bluffs, sometimes inclined at so precipitous
an angle that nothing can grow upon them, excepting, here and
there, a conifer or two; and sometimes at so obtuse an angle that the
slopes are covered with grass. These varying inclinations reproduce
themselves in the bounding ranges of the valley of Egypt. The Platte
writhes, like a snake, from side to side of its flat valley, cutting away
in one place the alluvium, all of which it had itself deposited, and
transporting it to another. It is continually silting up its channel, first in
one place, and then in another, with bars and banks, which oblige
the stream to find itself a new channel to the right or left. The bluffs,
though now generally at a considerable distance from the river, must
have been formed by it, when it was working sometimes against one,
and sometimes against the other side of the valley; and sometimes
also for long periods leaving both, and running in a midway channel.
Why should not the Nile have done the same?
This supposition is supported by the fact that when you have a soft
cretaceous limestone, and rocks that may be easily worn away, the
valley of Egypt is wide. When, as you ascend the stream, you pass
at Silsiléh into the region of compact siliceous sandstone, the valley
immediately narrows. And when you enter the granite region at
Assouan, there ceases to be any valley at all. The river has not been
able, in all the ages of its existence, to do more than cut itself an
insufficient channel in this intractable rock. All this is just what you
would expect on the supposition that it was the river that had cut out
the valley.
We are sure, at all events, of one step in this process. For there is
incontrovertible evidence that, in the historical period, the river
flowed at a level twenty-seven feet higher than it does at present, as
far down as Silsiléh. In several places, down to that point, may be
found the Nile alluvium, deposited on the contiguous high ground at
that height above the highest level the river now reaches in its
annual inundations. There is, besides, the old deserted channel from
a little below Philæ to Assouan, into which the river cannot now rise.
Here, then, is the evidence of Nature.
We have also the testimony of man to the same fact,
contemporary testimony inscribed on the granite. Herodotus tells us,
that from the time of Mœris, the Egyptians had preserved an
uninterrupted register of the annual risings of the Nile. This Mœris of
the Greeks was Amenemha III., one of the last kings of the primæval
monarchy, before the invasion of the Hyksos. This register was
preserved both in a written record, in which the height of the
inundation was given in figures for each year, (this is what Herodotus
mentions,) and also in engraved markings on suitable river-side
rocks. Of these markings, we, fortunately, have a series at Semnéh,
in Nubia. Sesortesen II., the father of Amenemha III., had conquered
Nubia. This event took place between two and three thousand years
before our era. To secure his conquest, he built at Semnéh a strong
castle on one of the perpendicular granite cliffs, between which the
Nile had cut its channel. His son, not content with instituting the
written register Herodotus mentions, ordered that the height of the
inundation should, each year, be inscribed on the granite cliffs of
Semnéh, which had been fortified by his father, and where an
Egyptian garrison was kept. This castle, little injured by time, is still
standing. Here was the most appropriate place for such a register. It
was the actual bank of the river; it was perpendicular; it was
indestructible; it measured all the water that came into Egypt.
Amenemha must have been familiar with the place, for it was the
custom of the princes to accompany the king in war. Now, there are
thirteen of Amenemha’s inscriptions at this day on this cliff. Each
gives a deeply-incised line for the height of the rising, and under it is
an hieroglyphic inscription, informing us that that line indicates the
height to which the river rose in such and such a year of
Amenemha’s reign. In every instance the date is given. In the reign
of Amenemha’s successor, the invasion of the Hyksos took place,