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Ministers of finance support introduction of dynamic provisioning into European banking legislation

Lewis KingBrussels, 06/07/2009 (Agence Europe) - European ministers of finance will reach an agreement this Tuesday on the introduction into European banking legislation of "dynamic provisioning", in an effort to improve the fight against financial instability. In its provisional conclusions on the pro-cyclical effects of safeguard rules and accounting standards in force, they say that they are in favour of an instrument which, "consists in constituting provisions deducted from profits in good times for expected losses on loan portfolios". One ambassador, who said that there was consensus between member states on such an important subject added that, "certain safeguards or accounting standards highlight the (economic) tendency, whereas, during a crisis we want to find a way of confronting cycle tendencies...A cycle is necessary for getting over future difficulties". The Commission will propose a revision in the direction of the Basle II directive in the autumn on capital bank requirements (EUROPE 9930). 

Dynamic Provisioning & Bank Capital Integrity: Banking Supervision

yacht wheelIt looks as though the "Dynamic Provisioning" (DP) approach or technique to the computation of Bank Capital in the context of Banking Supervision is gaining the ascendancy in the UK and Europe as a solution to ensuring banks hold sufficient reserves such that a credit crisis never occurs again. In reinforcing the tripartite arrangements to Banking Supervision and Regulation in the UK, the Chancellor appears to be favoring this approach which developed in Spain and it has to be said was successful (relatively). One challenge that Dynamic Provisioning gets around is the issue of procyclicality of capital buffers, perceived to be a problem with Basel II. In effect what DP does is to integrate Basel II Pillar One and Pillar Two by making total capital explicit and transparent over the business cycle. DP requires however an econometric model of the business cycle to drive the capital estimates predicated on outlooks for default (as a function of the business cycle). This is an interesting approach since finally an accounting standard is being putatively harnessed to an econometric technique.

Goldman Sachs boss defends Fair Value

Robert Longo.jpg

Goldman Sachs boss comes to defence of ‘fair value’ accounting

by Ian Fraser, award winning Scottish Financial Journalist

 

Papers in April (2009) from the Bank for International Settlements

Basel SBBIn April, the Bank for International Settlements has published three new papers which develop the body of knowledge (the theory forge, as we like to call it) in the topic of Credit Risk analytics, stress testing and Economic Capital quantification. This post will summarise and refer them for you.

 

FINANCIAL SECTOR PRO-CYCLICALITY LESSONS FROM THE CRISIS Banca d’Italia

 

FINANCIAL SECTOR PRO-CYCLICALITY

LESSONS FROM THE CRISIS

FSP FAS 157-e Determining Whether a Market Is Not Active and a Transaction Is Not Distressed.

Yesterday, the US Financial Accounting Standards Board approved three FASB Staff Positions (FSPs) to clarify fair value accounting for financial instruments, particularly in distressed markets. The Board had received 600 comment letters on three proposed FSPs. The letters presented mixed messages from investors, individuals, preparers, regulatory bodies, business associations, and auditors regarding the proposed FSPs. An extensive discussion took place before consensuses were reached by FASB to draft and issue final standards:

Structured Product (Toxic or Impaired) Asset Pricing and Valuation Theoretical & Applied Modelling References BLUEPRINTS (ABBU)

This is all part of the 'Theory Forge' (or theoretical framework) which I have been initiating recently. Our publications work (we think) by explaining more fully our theoretical point of view & our specific approach to quantitative analytics in risk management and finance. The content is mostly taken from the higher level theoretical background with which we approach specific client engagements.

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