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STRESS-TESTS: EU FINANCIAL REGULATORS COMPLY WITH POLITICAL BIAS MORE THAN BASEL II

basel carnival.jpg
Stress-tests are supposedly harmonised, at least for banks in the banking sectors of each country, but not across all EU member states, to test for shocks to a country's banking system when current risk assessments are suddenly inverted by falls in investment, in consumer demand, savings, loans, and by fast rising long term bond yields, and when presumably wholesale financial markets become 'one-way' (either buy-buy or sell-sell)!  The indicator values of sudden change are provided by the EU regulatory authorities, but in a narrative form and using an abstractionist, sometimes over-coy, language that is farcical.

This is not how the CRD and BIS Basel II regulations and guidelines specified the laws for this.

In the original regulations, stress-test calculations are expected to be conceived by the banks from their own macro-economic models including their own models of their banking sectors and of how and where their banks fit within those sectors. Instead, the regulators of today provide precise values by which asset class prices and some macro-economic variables are expected to adversely move according to a shock scenario, according to a narrative that cannot make sense to bankers or economists! Moreover, they do not provide models for how to assess the whole scenario. Consequently, banks must assess balance sheet impacts on a line by line basis and not worry about whether the overall picture or its timeframe is realistic or if there are allowances for effective risk mitigations, merely the summing of capital losses (nominal, as if crystallised instantly in full).

The reason for this is that banks proved to be extremely reluctant to invest time and resources in building macro-models of their business and of their banking sectors, largely because they also wished strenuously to avoid accepting responsibility for what happens in  underlying macro-economies, nationally and internationally. They are suspected of being likely to game any degrees of freedom given to them to try and intelligently work it out for themselves. This way no one will learn anything new and really useful.

What is all this Basel regulation stuff about, anyway?

Back in the mists of time (about 10 years ago) it must have been; that was the question I was asked to answer; I did a lot of work so the client must have been seriously interested;-

What the bloody hell is this Basel Thing Anyway?

Stress Tests - A New Modeling Paradigm & a Pragmatic Approach

I have been reviewing the papers from a recent conference;-

The ESRB at 1

SUERF/Deutsche Bundesbank/IMFS Conference

& I think there is a crystallisation of a theme at that conference reflected in one particular presentation which articulates a narrative that we have been developing here on asymptotix in regard to Stress testing over the last 2 or 3 years.

Liquidity Risk - The Sharp End Issue of the Credit Crunch in 2008

Liquidity Risk is a confused topic (from a supervisory or B2 perspective)

because it has not been clear whether this is a risk type to be treated qualitatively or quantitatively through the development of the Basel II (B2) accords. In the initial months after the first Basel Accords were published most European regulators discussed the challenge of Liquidity Risk in qualitative terms. Latterly however the emphasis has been on the need for regulated financial institutions (FI) to stress test this aspect of Market Risk. This stress testing requirement demands that Liquidity Risk be treated quantitatively, from the perspective of a methodological approach to capturing how the FI’s exposure to this risk may fluctuate under extreme conditions.

Conceptual Foundations of a TOM for an ICU

Conceptual Foundations of a TOM (Target Operating Model) for an ICU (Internal Capital Unit)

 

The ICU is that applicable, particularly in Pillar 2 of Basel II, Basel III or Solvency II; development of a TOM is no easy task but is fundamental to the success of technology and process or competence change when implementing an ICU successfully. Clear demonstration of an effective and operational ICU is fundamental to financial institution supervision today. Development of a TOM needs a great deal of thinking and we at asymptotix have done some of that over the years. The foundations of our thinking about ICU-TOM is the SAP B2P2 white paper, vintage 2006 here but the clear development of our thinking is the peer-group validated, challenged and socialised approach to development of a TOM for an ICU is given in John Morrison's consolidated presentation of thinking in this space for the academic conference circuit of 2009 / 2010 and it is here Below in 5 brief pictures we present a summary of these ideas underlying a TOM-ICU; this is just a beginning, a conceptual foundation but presents some elements for consideration which are 'sine qua non';-

Copula Dependence Structure on Stock Market with Application to Risk

Copula Dependence Structure on Stock Market with Application to Risk

Basel III liquidity standard and strategy for assessing implementation of standards

The GHOS endorsed the Committee's comprehensive approach to monitoring and reviewing implementation of the Basel regulatory framework. GHOS Chairman and Governor of the Bank of England Mervyn King noted that "the focus on implementation represents a significant new direction for the Basel Committee. The level of scrutiny and transparency applied to the manner in which countries implement the rules the Committee has developed and agreed will help ensure full, timely and consistent implementation of the international minimum requirements".

Basel III links on Asymptotix

 
 
 
 
 
 
We have moved the B3 linx pad (which I know you all found useful) to the Drupal comment box below. B3 is heating up now (in 2012, as 2013 rolls towards us)! It's particularly hot in the Trading Book (Market Risk is looking more like Credit Risk, daily) & it seems as if Stress Testing is not a background oversight process anymore but a daily aspect of valuation!? We know volumes are a step-shift down in securities markets but looking at IMM, EEPE, CRR & that blinding cloud of acronyms, could it be the case that the combination of BIS & the EU Commission are trying to regulate securities trading away altogether? The process towards the CCP towers is fundamental, even though I do say its a 'dog's breakfast'; inside a CCP is going to look like an ivory tower of mathematical genius, if the current trajectory is completed. I want to use this page to keep abreast of developing 'stuff' in the B3 space; the DISQUS comment process is the optimal way to do that (below) & thus to provide easy access to the most current material for asymptotix users we have re-arranged this page.
 

Basel III framework for liquidity - Frequently asked questions

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the 16 December 2010 publication of the Basel III regulatory frameworks for capital and liquidity. To help ensure a consistent global implementation of Basel III, the Committee has agreed to periodically review frequently asked questions and publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.

Basel III definition of capital - Frequently asked questions

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the 16 December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability. To help ensure a consistent global implementation of Basel III, the Committee has agreed to periodically review frequently asked questions and publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.

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