Guest Post: Regulators Are Encouraging Banks To Game Risk Models - News and Current Events | futures trading

Go Back

> Futures Trading, News, Charts and Platforms > Traders Hideout > News and Current Events

Guest Post: Regulators Are Encouraging Banks To Game Risk Models
Started:November 15th, 2011 (03:50 PM) by Quick Summary Views / Replies:223 / 0
Last Reply:November 15th, 2011 (03:50 PM) Attachments:0

Welcome to

Welcome, Guest!

This forum was established to help traders (especially futures traders) by openly sharing indicators, strategies, methods, trading journals and discussing the psychology of trading.

We are fundamentally different than most other trading forums:
  • We work extremely hard to keep things positive on our forums.
  • We do not tolerate rude behavior, trolling, or vendor advertising in posts.
  • We firmly believe in openness and encourage sharing. The holy grail is within you, it is not something tangible you can download.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community. It's free and simple, and we will never resell your private information.

-- Big Mike

Thread Tools Search this Thread

Guest Post: Regulators Are Encouraging Banks To Game Risk Models

Old November 15th, 2011, 03:50 PM   #1 (permalink)
Quick Summary
Guest Post: Regulators Are Encouraging Banks To Game Risk Models

Submitted by Finance Addict

Regulators Are Encouraging Banks To Game Risk Models

Two interesting articles were published yesterday discussing how banks in Europe are resorting to clever tricks that artificially raise their loss-absorbing capital to levels specified by regulators. They’re doing this especially to hit the level of 9% core capital-as-a-percentage of risk-weighted assets that the regulators require as a response to the most recent stress tests. While actually selling loans and exposures would be one way to achieve this so-called “risk-weighted asset optimization”, it looks like many banks are actually just choosing to fiddle around with the internal, self-created risk models that both the current Basel II and the not-so-new-and-improved Basel III regulatory regimes allow them to use. Yes, these regulatory regimes allow the banks to decide, for themselves, how risky their loans are. Which of course then drives how much or how little loss-absorbing capital they must hold. Don’t worry, though, because the regulators approve the models on a yearly basis.

And which banks have taken advantage of this so far?

Reuters reports in Financial Alchemy Foils Capital Rules as Banks Redefine Risk that
“Santander said it planned to increase capital by 4 billion euros by optimizing risk-weighted assets and internal models. BBVA said the total effect of revising its model was expected to be 2.1 billion euros of additional capital.”

I haven’t yet come across an instance of a bank having to increase its count of risk-weighted assets due to its model changes. Funny how it seems to move in one direction only. For example in Fears rise over lenders’ capital tinkering the Financial Times notes that Lloyds has, through a combination of selling and model-tinkering, dropped its 2010 risk-weighted assets by a whopping £16 billion. With the blessing of UK regulators.

And why might the regulators be so approving of such dubious and artificial tactics? Well, sorry to say, we’re in a little bit of a hostage situation at the moment. The banks are reluctant to raise capital on the equity markets because 1) their share prices are already in the toilet and 2) issuing shares to new investors would make current investors unhappy. (Although, probably not as unhappy as if the bank were to collapse for failing to hold enough capital to absorb its losses.) Meanwhile people are deathly afraid that the banks will cut off credit to small business sector. (That is, any more than they already have.) Have a look at what Andrew Haldane of the Bank of England said in a speech yesterday:
”‘There is a strong argument for making risk weights dynamic and real-economy focused. At present, they are calibrated to the risk to a bank. In future, they need to reflect returns to society,’ he was quoted as saying.”

And he’s not a politician, but a regulator. In fact, he is the Executive Director of Financial Stability. And Haldane, in my opinion, generally has the right idea about banks and their risks. Which are risks not just “to themselves” but to all of society and the global economy. Yet here Haldane’s endorsing the sort of sleight of hand that banks are all too ready to perform with no encouragement. Not a good sign.

More on ZeroHedge...

Reply to share your thoughts on this current event.


Reply > Futures Trading, News, Charts and Platforms > Traders Hideout > News and Current Events > Guest Post: Regulators Are Encouraging Banks To Game Risk Models

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Upcoming Webinars and Events (4:30PM ET unless noted)

NinjaTrader 8: Programming Profitable Trading Edges w/Scott Hodson

Elite only

Anthony Drager: Executing on Intermarket Correlations & Order Flow, Part 2

Elite only

Adam Grimes: Five critically important keys to professional trading

Elite only

Machine Learning Concepts w/FIO member NJAMC

Elite only

MarketDelta Cloud Platform: Announcing new mobile features

Dec 1

NinjaTrader 8: Features and Enhancements

Dec 6

Similar Threads
Thread Thread Starter Forum Replies Last Post
Guest Post: Performance Anxiety Quick Summary News and Current Events 0 October 28th, 2011 03:10 PM
Watchdog: Regulators bowed to banks on bailout kbit News and Current Events 0 September 30th, 2011 05:36 AM
Event Risk Huge Despite Central Banks' Intervention Quick Summary News and Current Events 0 September 16th, 2011 05:20 AM
Good Models Gone Bad MXASJ Traders Hideout 3 October 25th, 2009 02:05 PM
Free Risk Management Game... Jugador Psychology and Money Management 0 August 20th, 2009 09:58 AM

All times are GMT -4. The time now is 08:08 AM.

Copyright © 2016 by All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts

Page generated 2016-10-28 in 0.05 seconds with 19 queries on phoenix via your IP