FROM BASEL III TO BASEL II Fernando J Cardim de Carvalho Institute of Economics Federal University of Rio de Janeiro Rio de Janeiro 23 and 24 August 2011 Basel II Hailed as evolution compared to B I ID: 418584
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BACK TO THE FUTURE?FROM BASEL III TO BASEL II
Fernando J.
Cardim
de
Carvalho
Institute of Economics
Federal University of Rio de Janeiro
Rio
de Janeiro, 23 and 24 August, 2011Slide2
Basel II
Hailed as evolution compared to B I
More precise treatment of credit risks
Market-friendly: based on markets’ best practices in risk measurement (inducement instead of compulsion; working through private financial practices)
Role for market disciplineSlide3
But also criticisms
Pro-cyclicality (
Goodhart
)
Complexity (“ridiculous” according to head of OCC)
Too prescriptive (Barth,
Caprio
, Levine)
Emphasis on risk measurement
Difficulties in measuring credit risk
Weight of operational risk on total capital chargesSlide4
Cont.
Excessive demands on Supervisors
Underestimation of many risks, including liquidity (left to pillar II)
Systemic risk as an externality: cannot be internalized
Values and parameters to
VaR
are not given: they change with banks’ behaviorSlide5
Basel III
Narrower definition of capital for regulatory purposes: redefined tier I (from inducement to prudence to sharing the burden)
Tougher on securitization and
ressecuritization
Rising capital requirements
Leverage ratio
Interaction between classes of riskSlide6
Cont.
Liquidity risks (market and financing)
Stress tests (normal and abnormal)
Feedback effects (
eg
mark to market) left to pillar II
Anti-cyclical and anti-systemic risk buffers
Higher demands on systemically important institutionsSlide7
Some Assessment
Minskyian
concerns? Rediscovery of concern with liquidity, but measurement problems remain; Leverage ratio.
Capital requirements: how much is enough?
Insistence on risk measurement as regulatory concern: maintains principle that systemic safety is maintained through private perceptions and measurements of riskSlide8
Cont.
Systemic risk: consider interrelations: how?
Concept of systemically relevant
Endogeneity
of parameters in
VaR
models
Role of rating agencies maintained