14 Apr 2008, David Benyon, Operational Risk & Regulation
LONDON – “Basel II is sophisticated and sorely needed,” says Nout Wellink, chairman of the Basel committee on banking supervision. Wellink, president of the Netherlands Bank, was writing in defence of the Basel II Accord in the Financial Times last week.
Wellink responded to criticism that Basel II’s capital models have been proven vulnerable by the recent credit crunch and fail to constrain risk-taking. ‘Basel II does not allow banks to use the credit pricing models that failed to perform. Nor does it permit the modelling of correlations, which broke down under stress. Instead, the framework requires banks to develop robust data series on defaults, losses and recoveries that include an economic downturn.’
He also replied to criticisms that Basel II is pro-cyclical by nature, causing its models to exacerbate market downturns. ‘The Basel committee has worked hard to introduce many safeguards across the three pillars of the framework to achieve a reasonable balance between risk sensitivity at banks and the stability of industry capital over the cycle. This includes the requirement that banks perform stress tests and demonstrate that they hold adequate cushions above the minimum during good economic conditions, in order to weather such stress.’
Criticism of pro-cyclicality was voiced last week by Lord Eatwell, Cambridge professor of finance, at last week’s OpRisk Europe conference held in London. The details of the conference will be published in the next issue of OpRisk & Compliance magazine.
Wellink also highlighted the Basel committee’s current work aimed at strengthening global standards for managing and supervising liquidity risk, which it will issue for public comment in the months ahead.
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