Sunday, March 19, 2017

Basel Issues Step-In Risk Consultation Sequel

Author: David Schwartz

On March 15, 2017 the Basel Committee on Banking Supervision published a second consultation paper on guidelines for the identification and management of step-in risk. The first consultation on the topic in December of 2015 set out a framework for identifying and managing step-in risk – the risk that a bank might support unconsolidated entities, beyond any contractual obligation, to protect itself from any reputational damage arising from its connection to such entities. This second consultation takes into consideration comments received on the first proposal, includes proposed reporting and other templates to regulators, and offers a timetable for adoption of the framework. 

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Monday, December 5, 2016

Basel Chair Calls for More Research into Bank Risk Models

Author: David Schwartz

In his December 2, 2016 keynote speech at the second Conference on Banking Development, Stability and Sustainability, Basel Committee Chairman Stefan Ingves invited the financial industry and academics to help better calibrate capital and liquidity standards. As the Committee finalizes Basel III, Ingves said that he welcomes research and rigorous analysis of how the Committee should think about the capital benefits of allowing banks to use internally modeled approaches to calibrate appropriate capital floors. While standardized modeling approaches have the benefit of being uniform and simple, they lack precision and may ignore real differences in risk among banks better addressed by internal models. Recognizing that “academic challenge…is an essential ingredient of a healthy financial and regulatory system,” Chairman Ingves says that the Basel Committee is eager to see research that answers questions like:

 

  • What are the pre-conditions for such models to produce better outcomes than, say, simpler standardized approaches? 
  • To whom do the benefits of improved modeling accrue?  For example, if a bank using a model can lower its capital requirements by, say, 30%, what are the financial stability and real economy benefits of such an approach? 
  • To what extent do the benefits of modeling accrue to lower-risk borrowers as opposed to the parties being compensated for developing and using the models?
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Monday, September 19, 2016

Has Crisis Regulation Made Banks Less Safe?

Regulations Based on Flawed Assumptions May Make Banks Riskier

Author: David Schwartz

The response to the financial crisis was a raft of new regulation aimed at reducing the risks posed by financial institutions. But now with strict new liquidity and leverage ratios, increased capital requirements, and restrictions on banking activities versus investing activities, are banks safer than they were prior to the crisis?  In a paper published for the September 15 and 16, 2016 BPEA conference, Harvard’s Natasha Sarin and Larry Summers try to answer that very question. 

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Thursday, March 24, 2016

Basel Proposes Changes to Reduce Variation in Credit Risk Weighted Assets

Author: David Schwartz

The Basel Committee on Banking Supervision today released a consultative document proposing a set of changes to the Basel III framework’s approaches for determining Banks' regulatory capital requirements for credit risk.  The goals of these changes are to (i) reduce the complexity of the regulatory framework and improve comparability; and (ii) address excessive variability in the capital requirements for credit risk.

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Monday, March 7, 2016

Basel Consults on Overhaul of Operational Risk Management

New Framework May Raise Overall Capital Requirements for Some Banks

Author: David Schwartz

On March 4, 2016, the Basel Committee issued a consultation paper on the standardised measurement approach for operational risk. The newly proposed framework, dubbed the “single measurement approach” (SMA) for risk assessment, addresses weaknesses BIS has identified in the existing framework, which the consultation document describes as “unduly complex.” 

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