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Causal Capital ~ The Knowledge Capital Specialists

BIS Rationalises Basel III

I am not sure these guys should be smiling when credit model simplification potentially stands to mute or mask reality. To use their language, The Bank for International Settlements wants to create a standardised version of the risk being taken by banks and undoing risk reporting sophistication is supposedly a way to achieve that end.

Ironically, this video is a bit of a reckoning for risk managers that have performed well with their models and I believe it is both premature and naive to believe that bankers won't try to game their capital numbers as an outcome of these new regulatory efforts alone.

Finalising Basel III | BIS

As Basel III is pressed through, one has this feeling that a decade of toil is taking the world of risk management backwards and into a pre-crisis level of model sophistication and all for the purpose of creating a reporting measure that can be a one size fits all.

There is a claim that reducing the sensitivity of credit risk reports will make the banking system as a whole more resilient, but this seems to be a little fallacious and unconvincing. Then if such humble endings are not enough, the Revised Credit Valuation Adjustment Framework (that's a bit of a mouthful) is not due for implementation until 2022. This is a really long way out and one would have thought it can't be that difficult to revert to ancient way of doing things but apparently that is the way things are today.

What BIS are trying to achieve is clear, and it's potentially a noble goal, but to create a level playing field for risk managers by turning down the volume on uncertainty and from the model corner alone, is chancing unwanted repercussions.

Most importantly, credit risk as an entire ecosystem of uncertainty has a large and diverse array of epistemic sources that are highly intertwined. We have to be real for a moment because the risk in credit risk sits at an obligor level, not in the model.

To put it simply and why not as simplification is the name of the game at present; taking speedometers out of cars doesn't prevent drivers from breaking speed limits.


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