Market Discipline and Appropriate Disclosure in Basel II

Lawrence J White

Contents
1.

Development and Validation of Key Estimates for Capital Models

2.

Explaining the Correlation in Basel II: Derivation and Evaluation

3.

Explaining the Credit Risk Elements in Basel II

4.

Loss Given Default and Recovery Risk: From Basel II Standards to Effective Risk Management Tools

5.

Assessing the Validity of Basel II Models in Measuring Risk of Credit Portfolios

6.

Measuring Counterparty Credit Risk for Trading Products under Basel II

7.

Implementation of an IRB-Compliant Rating System

8.

Stress Tests of Banks’ Regulatory Capital Adequacy: Application to Tier 1 Capital and to Pillar 2 Stress Tests

9.

Advanced Credit Model Performance Testing to Meet Basel Requirements: How Things Have Changed!

10.

Designing and Implementing a Basel II Compliant PIT–TTC Ratings Framework

11.

Basel II in the Light of Moody’s KMV Evidence

12.

Basel II Capital Adequacy Rules for Retail Exposures

13.

IRB-Compliant Models in Retail Banking

14.

Basel II Capital Adequacy Rules for Securitisations

15.

Regulatory Priorities and Expectations in the Implementation of the IRB Approach

16.

Market Discipline and Appropriate Disclosure in Basel II

17.

Validation of Banks’ Internal Rating Systems – A Supervisory Perspective

18.

Rebalancing the Three Pillars of Basel II

19.

Implementing a Basel II Scenario-Based AMA for Operational Risk

20.

Loss Distribution Approach in Practice

21.

An Operational Risk Rating Model Approach to Better Measurement and Management of Operational Risk

22.

Constructing an Operational Event Database

23.

Insurance and Operational Risk

INTRODUCTION

This is an excellent time to be addressing issues of financial disclosure for financial conglomerates. After decades of debating an end to the Glass-Steagall and Bank Holding Company Acts’ limitations on banks’ participation in other parts of the financial services universe, the US Congress finally passed the Gramm-Leach-Bliley Act in 1999. Less than three years later, two large financial conglomerates – Citigroup and JPMorgan Chase – received stunning public rebukes for their roles in the accounting and corporate governance manipulations of some of their clients.

Simultaneously, the Bank for International Settlements’ (BIS) Basel Committee on Banking Supervision has proposed a revision (henceforth, Basel II) to its 1988 capital standards, in which “market discipline” – driven by public disclosure – is one of the three “pillars” for strengthening the safety and soundness of banks (see BIS, 1998b, 2000a, 2001b–d, f, h).

This chapter will address the disclosure issues for financial conglomerates principally from the same perspective as that of the Basel Committee: that disclosure is important for the safety and soundness of banks. We will, however, reach substantially

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