New Basel capital framework ready to go

Introduction

After more than seven years of consultation, lobbying and countless redrafts, the new Basel capital framework is just about ready to go. In Europe and parts of Asia, banks are preparing to introduce the standardised and foundation internal ratings-based (IRB) approaches to Basel II from January of next year. In the US, a decision by regulators to delay implementation means the country's most sophisticated banks will begin their parallel runs of the advanced IRB approach from January 2008.

Nonetheless, a lot of work still remains to be done within financial institutions' risk divisions. In some cases, banks have been holding off their implementation efforts until various outstanding issues had been resolved - for instance, the treatment of double default effects, an issue that wasn't addressed until July last year. In others, risk managers have been waiting for national supervisors to publish domestic implementation guidelines before making the final calibrations to their internal models. In fact, the potential for individual supervisors to treat the various items of national discretion embedded within the Basel II framework differently has been the cause of many a sleepless night for risk managers.

Given the amount of work that still needs to be done on Basel II, it should come as no surprise that the new regulatory capital framework features prominently in Risk International 2006. Consulting and IT services firm Infosys Technologies looks at some of the challenges banks face in managing credit risk exposures under Basel II, while Dublin-based risk control and compliance software provider C^i3 argues that the calculation of the new operational risk charge should not be the be-all-and-end-all of any bank's operational risk project.

A related area is that of collateral management. According to a survey published in March by the International Swaps and Derivatives Association, the amount of collateral in circulation is now estimated at $1.44 trillion, an increase of 19% over 2005. Around 59% of all derivatives transactions are now covered by collateral, making this the primary risk mitigation tool.

In this year's issue of Risk International, London-based business and process control software provider Business Control Solutions looks at the front-to-back processes involved in collateral management, while London-based collateral management systems provider Allustra examines the management and analysis techniques required by collateral managers. Also exploring the collateral management theme is London-based trading and risk management systems provider Lombard Risk, which highlights the increase in demand for collateral management technology across all sectors of the financial market.

Also in this issue are articles on convertible bond pricing, trading technology and integrated data management. The world of risk management and derivatives is changing rapidly - Risk International is aimed at keeping readers at the cutting edge of all the latest developments.

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