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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.

the asymptotix of the basel accords

The asymptotic Basel II Tier One Capital formula

The Basel II Capital Accord seeks to improve on the existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face. One of the risk types described in the Capital Accord is credit risk. Banks need to hold capital to cover the credit risk on their credit portfolio.

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?

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';-

Adjustments to the Basel II market risk framework announced by the Basel Committee

The Basel Committee on Banking Supervision has agreed on certain adjustments to the document Revisions to the Basel II market risk framework (the market risk revisions). This revised market risk framework was released in July 2009 and covered the following areas:

Market Risk: Solving for Basel II and IFRS7 with SIAG

coins madridMarket (Price) Risk - Abstracting the Liquidity Component

Market Risk is different. Liquidity Risk is different even further. Conceptually they are in bed together, although Liquidity risk has risen up the food chain recently as the impregnability of the banking book has been seen to be a chimera as the tide of the crisis went out. One thing is for certain these are the two biggest headaches from Bishopsgate to the Barbican. The Liquidity risk story is well documented here so this blog has a focus on the Market Risk (Price) problem and how to solve it for its two currently key variables – Basel II and IFRS7.

FSA strengthens stress testing regime

srp processThe Financial Services Authority (FSA) has strengthened its stress testing regime by requiring firms to improve their stress testing capability, enhance their capital planning stress testing and by introducing a reverse stress testing requirement for firms.

The FSA’s integrated approach to stress testing consists of three main elements:

ISSUES IN MODEL RISK

 

the elephant in the data centre

(see below)

 

UBS Transparency in Financial Reporting Setting the Standard

UBS office(in my view!) Have a look at this. It is the new Quarterly Reporting page of UBS. Impressive No?

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