Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013 - (Page 82)
The Financial Risk Observatory
AWARENESS IS THE FIRST STEP...
By Hugues Pirotte, FinMetrics SA
We can probably say that we are in the aftermath period
of the financial crisis. What are we left with? Basel 3 or
2.5, IFRS new rule enforcements, acts such as DoddFrank and EMIR, a plethora of new regulatory bodies,
some gurus who pretend «it was obvious» that something was wrong, others arguing that what happened
to banks cannot happen to them, many initiatives on
«ethical finance», and some brilliant exercises. One of
these is the following one...
LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE
—
N°81
— APR / MAY / JUNE
2013
The EBA capital charge exercise
82
On February 26th, the EBA (European Banking Authority) released an interesting report on the analysis of an
exercise that was conducted to try to shed some light on
the comparability of bank internal models. Until now, it
was very difficult to compare stress-tests because of the
specificities of each bank. Thus, the EBA decided to send
out identical portfolios of corporate, retail, sovereign,
bank exposures to 89 big banks in 16 countries and asked
them to show what their internal model would produce
in terms of risk-weighted assets (RWA) measures. Results were striking: in the corporate and retail portfolio
cases, the charge could vary by a factor just below 2 and
3 respectively, between banks. This does not advocate
for principle-based rules... But the report of the EBA
goes further on trying to understand where do these
differences come from. They try to understand how
much is due to the specific treatment of the regulation
in each country and to the balance-sheet structure (socalled A-type gap) and how much seems to be due to the
estimation of risk parameters (so-called B-type gap).
Whilst the A-type is «closer» to the regulator since it is
related to local interpretations of the CRD, the B-type is
at the heart of the principle-based freedom of banks to
come up with their own modelling and implementation.
And...the study shows that at least half of the total gap
between the 5th and the 95th percentile should be due
to the B-type gap à priori.
A second figure in the same report shows the allocation
for each of the 89 banks between the various types of risks
and treatments. RWA measures are relying at around 80%
on average on the credit risk component measuredthrough the internal rating-based approach (IRB).
Thus, if there is evidence that the estimation of risk
parameters is quite diverse and on top of that, a large
portion of the RWA relies on the IRB which makes use of
these parameters, this provides support to our preoccupation on the confidence of the results obtained.
Overall, this incentivises the EBA to pursue the analysis
further. This tends to confirm that, as long as we cannot
validate systematically what is being done internally,
principle-based rules leave a lot of leeway and it is really
hard or myopic to only look at the «perimeter» without
digging inside the «perimeter». But I am not sure we
will learn any big lesson out of this. We will continue
adding more controls, more verifications, potentially
broadening a new form of auditing firms, «the validators», that already exists but in limited sizes for the time
being. At the end of the day, the past has shown that
adding more intermediaries to the chain does not necessarily make our financial environment better and more
efficient. It would be interesting to run a cost-benefit analysis of risk control, of its stakeholders and the
governance of a system where we bet on the alignment
of individual incentives of the actors of the game with
the disclosed objective of the regulation and control. The
purpose here is not to sound cynical but to try, through
some provocative but now supported arguments, to generate a desire to question more (a) the way we are addressing the future of regulation and control, and (b) the
real independence of judgment of the parties involved.
Corporate treasurers do have a role to play, as the clients
and suppliers of the financial network.
The linking corner...
• Want to follow nice stories exchanged between London traders? Check them at hereisthecity.com
• Check-out the following website on fallacies on banking financing: http://www.gsb.stanford.edu/news/
research/admati.etal.html
http://www.hereisthecity.com
http://www.gsb.stanford.edu/news/research/admati.etal.html
Table des matières de la publication Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013
Couverture
EDITORIAL
SOMMAIRE
FINANCIAL HIGHLIGHTS
INTERVIEW - Patrick Siméon and Ibra Wane, Amundi
FOCUS
FORUM OF ADVERTISERS
CORPORATE FINANCE
15 MINUTES WITH - Jörg Wiemer -Treasury Intelligence Solutions - TIS
NEWS
The Financial Risk Observatory
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