
Bank associations hit out at Basel II failings
“The ultimate effectiveness of the new Accord depends on how it is implemented in each country,” said the IIF in a statement. “The IIF, which has repeatedly stressed the importance of consistency of implementation across the major markets, noted that much remains to be done for Basel II to deliver the full benefits of a level playing field and risk-sensitive capital adequacy regulation. Appropriate co-ordination between home and host supervisors is at the top of the list.”
Isda put forward a similar message: “Isda believes the number of [national regulator] discretions should be reduced to avoid serious inconsistencies.”
The IIF also criticised the Basel Committee’s decision to stagger the introduction of the new Accord. The two basic forms of compliance – the basic and standardised approaches for credit risk and the standardised and foundation approaches for operational risk – remain scheduled for the end of 2006. But the implementation of the advanced internal ratings-based approach for credit risk and the advanced measurement approach for operational risk were delayed until the end of 2007. “Without a common implementation date for all approaches, problems of international consistency and manageability may be exacerbated for internationally active banks,” said IIF managing director Charles Dallara.
Isda also hit out at issues around ‘double default risk’ linked to the purchase of unfunded credit protection, the treatment of counterparty credit risk arising from derivatives transactions and the use of portfolio credit risk monitoring.
Isda called the Basel Committee’s treatment of double default – where a firm has to set aside capital assuming a worst-case joint default scenario between the protection seller and the underlying credit on which protection is acquired – as “overly conservative”. The association said the Basel Committee’s treatment failed to recognise the greater protection provided by guarantors whose credit quality is not significantly correlated with that of the underlying asset. But the association said it remains hopeful that a more risk-sensitive treatment, designed on the back of research by the US Federal Reserve Board, could still be inserted into Basel II, although it did not provide further details.
The trade body added that the Committee had not addressed issues related to capital treatment of counterparty risks associated with derivatives transactions. But it welcomed the Committee’s decision to reassess the issue in conjunction with the International Organization of Securities Commissions (Iosco). “Isda and its member firms have met with the joint Basel/Iosco working group and is hopeful a change can be brought to the measurement of future exposure arising from both derivatives and securities financing transactions by the end of March 2005,” the association said.
On portfolio credit risk modelling, Isda noted the Committee had decided not to allow banks to use internal portfolio credit risk models to determine regulatory capital requirements following consideration of such an approach prior to its publication of its first consultative paper on the new accord in early 2001. But the association said the Committee’s prior concerns – that such models varied significantly across different organisations – have fallen significantly in the past three years. Isda believes the use of portfolio credit risk modelling has matured and urged regulators to review new evidence it is compiling on the matter.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Derivatives
US life insurer index options market hits $1trn mark
Counterparty Radar: Lincoln Financial emerges as top player in Q4 with $43 billion portfolio increase
Long-end euro swap pricing anomaly remains largely untapped
Deviation in swap curve attracts limited interest because of regulatory and pension reform barriers
SG1 growth slower than expected, say LPs
Despite sluggish take-up of Singapore FX matching engines, some hope a new NDF venue will offer a boost
Eurex scrambles to avert Treasury collateral ban on US default
Current policy prevents CCP from selectively excluding eligible collateral
Information geometry of risks and returns
An innovative product design framework and its geometric interpretation is introduced
Regional banks face soaring term SOFR spreads
Bid/offers hit 10bp as dealers price counterparty risk into non-cleared Libor transition trades
US court greenlights most claims in Currenex class action
Civil lawsuit brought by XTX and two other financial firms advances to next stage before trial
Allianz Life halves index CDS book in Q4
Counterparty Radar: Move by US market behemoth pushes life insurers’ notional down by almost 40%