A dangerous idea
Encouraging and supporting sound internal risk management has become an important aspect of effective financial regulation. Imposing a regulatory capital charge for stress-test losses would undermine this important objective, argues David Rowe
The Basel Committee's 1995 decision to allow use of internal models for calculating regulatory capital marked a significant departure from the traditional 'we know best' attitude on the part of regulators accompanied by detailed prescriptive rules. Consultation with industry risk practitioners convinced supervisors that the world was becoming too complicated and changing too fast for the old paradigm to assure safety and soundness of the banking system.
A significant aspect of the new supervisory
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