Home-hosting gets a roasting

Editor’s letter

The home-host, or group allocation issue, has suddenly flared up. It is an issue that is particularly thorny for op risk because of the use of internal models for capital calculation under the advanced measurement approach (AMA).

The problem with the home-host issue is that both sides of the argument are ‘right’. Banks quite reasonably point out that it would be difficult for them to conduct a complete AMA in a large number of subsidiaries. And they are also correct in pointing out that regulators will have to set aside their differences and work together or banks will be faced with rapidly escalating costs.

But regulators note that they have distinct legal responsibilities to their home jurisdictions that cannot simply be ‘agreed’ to disappear – they must keep their national financial system safe. Capital must rest within their territory, and a sufficient amount must be present to support the local financial firm.

The core problem is that the interests of the two sides of this argument are diametrically opposed to each other. It will take some very deft footwork by Accord Implementation Group head Nicholas Le Pan to sort this out. But sort it he must, or Basel II will limp out of the starting gate.