See this article from Risk Centre. I quote:
With all due respect to the Nout Wellink and the other members of the BCBS, we do not believe that the implementation of the Basel II proposal or anything that looks remotely like it would have alleviated the ongoing collapse of the market for complex structured assets. When an entire asset class literally dies in a matter of weeks, the risk is infinite. To us, measuring the liquidity or market risk of a Structured Investment Vehicle ("SIV"), with or without the Basel II framework, makes about as much sense as using statistics to predict corporate credit defaults.
Remember too that most of Basel II is based upon the very quantitative models and rating agency methods which caused the subprime crisis, thus offers of assistance from Basel II's creators within the BCBS should be viewed with caution. Basel II merely mimics the business processes of the Sell Side investment houses, systems which are intended first to enable new financial transactions and, as a secondary matter, manage the risk.
Without going into too much detail, I agree with the above sentiments. You see, I have a slightly different perspective on this. Based upon my previous research on extreme events, I am firmly of the belief that the relationships between various factors in these extreme events becomes dramatically non-linear in nature.
So a structure such as Basel II which relies on linear modeling to provide an indication of risk capital is ok for stable, linearly correlated markets but fails miserably when it moves into the fat tails. If you just look at the investment banks, they are taking billions of dollars in losses. My question, if you still are quibbling about it, why did the risk management models not pick up this problem?
Now the fact that the risk management models did not pick up the sub-prime mess leads me to wonder whether it makes sense to provide estimates of capital adequacy based upon these very same risk management models? No Sir.
The answer is that the banks need MORE capital, not less capital. More capital has the downside of implied opportunity cost, less capital has the downside of shaking the entire financial system through systemic risk. If I was a central banker, I would take a hard close look at Basel II.
No comments:
Post a Comment