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 • Check-out the following website on fallacies on banking financing: research/admati.etal.html

Table des matières de la publication Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013

INTERVIEW - Patrick Siméon and Ibra Wane, Amundi
15 MINUTES WITH - Jörg Wiemer -Treasury Intelligence Solutions - TIS
The Financial Risk Observatory

Trésorier/Treasurer magazine - n°81 - 2ème trimestre 2013