Evolving Regulatory Position in Basel II _________________________________
Following extensive work in the Basel II area, Volterra recently participated in a meeting with the FSA discussing developments. As we move through the recession the regulatory position on capital is evolving. The focus of the FSA is shifting towards:
- Interpreting Basel II in such a way as to provide stable capital requirements through the economic cycle
- Less emphasis on detailed account level analyses and behavioural scoring
- More emphasis on analysis that helps to understand the long run risk of a portfolio through an economic cycle
This is a direction which we support, having put the case for this change of emphasis previously in an article for Mortgage Finance Gazette.
There is an opportunity for IRB firms to take a big step forward. Not only can they achieve more stable capital requirements, but they can refocus their approaches to give a much clearer view of risk through the economic cycle. Basel outcomes can then be much more useful in providing intuitive and transparent information regarding the path through the current recession.
At Volterra our experience in rating system design, stress testing and economics put us in a unique and unrivalled position to guide firms through the changing regulatory position. We can help firms gain the benefits of the more transparent approach to understanding risk through different economic circumstances. We have worked on exactly the type of approaches the FSA have expressed an interest in and discussed in their recent CRSG memo and led industry thinking on these issues.
Areas of particular relevance are mortgage portfolios and corporate SME portfolios, where we have a proven track record of analysing both internal and external long run data. To discuss the evolving regulation or approaches to it email Matt Salisbury.
