What next?

Editor's letter

The beginning of May was dominated by fears of a global pandemic, although the initial media frenzy rapidly reduced to reflect the true low risk of widespread fatalities from swine flu. Nevertheless, op risk managers have been dusting off their pandemic business continuity plans and incorporating pandemics into their routine stress tests. The renewed focus on stress testing and a heightened realisation that bad things happen all the time that can severely affect the financial services industry ensured banks acted fast to cover all their bases. After coping with bird flu and SARs, banks seem to be rather more well prepared to deal with issues arising from global pandemics than from, say, a 30% fall in house price values ...

Bankers in the UK at least have been able to breathe a sigh of relief now that the media spotlight has been turned away from them, thanks to the MP expenses scandal hitting the headlines. MPs have supplanted bankers as the number one figures of public hatred, which hopefully should allow banks a period of calm to ensure they are making good progress with preparing for the imminent wave of new regulation. That said, there is still a good degree of panic in the banking community as risk managers attempt to second-guess what the supervisors will come out with next. The latest rumours focus on the betas used to calculate op risk capital charges for firms taking the standardised approach to op risk management. Rumours are circulating that the betas will be raised from 12-18% to 18-20%. This has been denied by sources, but such a move would not be surprising - the betas were initially set as a best guess and are due for review, especially in light of the crisis (see page 10). But these rumours are likely to provide more fuel to the fire of the Basel Committee conspiracy theory, which suggests that the Committee is seeking to raise capital at banks any way it can, including by raising the betas for firms taking the standardised and basic indicator approaches. We will continue to follow this story but for now at least it seems the Basel Committee is busy sorting out the market and credit risk aspects of Basel II, and it will be a while before it turns its attention to op risk charges.

Have a good month!