David Furlonger here. The call by the Bank of England for minimum capital requirements sets the scene for yet more regulatory oversight.
Calling for more capital reserves is one thing – having banks implement realistic risk management methodologies is another. Many firms who have been in distress have well established Basel II programs – these programs did not seem to stem the substantial losses or allow intervention at the crucial moment to mitigate market conditions. (It should also not be forgotten that the U.S. is substantially behind Basel II implementation compared to the rest of the world.)
Unless and until there is a clearer/more seamless link made between risk adjusted capital cost and performance, Basel II and any potential III or IV, are likely to be mere exercises in futility. The key is transparency. Basel II is not prescriptive. It does not tell institutions what risk methodology is acceptable from a business standpoint or what type of methodology should be used to achieve the best balance of risk and return.
How institutions mange risk will continue to be a competitive differentiator. Maybe regulation will give a better window into those risks and determine what structures and actions are off limits. But suitable transparency and risk management maturity, economic capital should flow to those with better risk-adjusted performance. This is a perfect opportunity for CIOs to demonstrate the value of IT to the business – IT is at the nexus of data, process and systems to provide a such insight into business performance. CIOs should grasp this opportunity with both hands.