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Even as Many Continue To Wrestle With Basel II – Do We Now Hear The Distant Clamoring in Regulatory Corridors For Basel III?

By Kristin Moyer | September 24, 2008 | 1 Comment

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.

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1 Comment

  • Thomas Martin Weber says:

    David refers to the discussions about Basel II short comings which goes back much longer and the crisis just proved the various of the points of critique where not that wrong after all.

    – the concept of value at risk: determination based on past experience (hypothesis that the recent past repeats near/mid term )
    – risk categories and commonly used models with similar shortcomings
    – szenario based analytics and shortcomings when we exclude extremes
    – the mentioned missing prescription of approaches
    to name only a few.

    Interestingly the more mature Basel II implementation in Europe had not the consequence of a much better risk capability which raised the question how effective the implementation had been.

    Basel II as well a Solvency II continues to be moves towards the right direction: create transparency, establish processes to manager identified risk and monitoring and reporting. It will demand more restrict parameters. Those parameters will be provided by the various regulators and we as well eventually see more focus on data; data to feed the regulatory process, data to provide real enterprise wide pictures. IT will continue to be the critical sector to enable risk management and support business performance.

    As we have experienced, events which disrupt whole product groups need to be considered in future and risk appetite and risk mitigation including economic capital requirements require changed approaches. Yes, we should expect more descriptive approaches from the regulator during the coming 24 month