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The New Basel II Accord (the Accord) refers to “stress testing” numerous times and in relation to each of its three pillars. Nowhere, however, does it attempt to define what constitutes an effective stress test. To echo one of the writers on the subject, the Accord is saying “we can’t define it, but we know it when we see it”. This introduces a problem for both the regulators and the regulated in attempting to agree on what a stress test is. This paper examines the current state of stress testing in relation to the Accord framework and arrives at a suggested approach to stress testing based on what is felt to be common use.

Support for this approach to stress testing is given in the paper discussed below on business continuity.

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Important paper released overnight (our time) from the Joint Forum of the BCBS. This one is one business continuity and you can expect the regulators to include its principles in future reviews and audits. Most institutions will have already reviewed their plans in light of many recent threats to business continuity, but you may want to review these in light of these principles and write up a paper for the regulator on how you meet these.

If you really do not want to read the full paper, the principles are over the fold. Read the rest of this entry »

Today’s Australian Financial Review has an interesting piece (sorry, not online and the ABC article is sketchy) that has Peter Costello, Australia’s Treasurer – read finance minister for non-Australians reading this- endorsing the principle of introducing deposit insurance in Australia. The ABC article says John Howard, our Prime Minister, also endorses the idea. Read the rest of this entry »

The smaller financial institutions in Australia seem to be under assault on all sides – except, perhaps, one. The regulators (APRA and, to an extent, ASIC) seem to give them a hard run, at times. The Basel II accord, although not explicitly helping the larger banks, gives an advantage to them in that they have enough data to model economic capital properly. Over the last 30 or so years very few (if any) new smaller institutions have opened their doors and many have merged into larger entities, or demutualised and listed.

Is this process a terminal decline in this sector of the industry?

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Following on from some other discussions I started to think of possible ways for Islamic banking to get started in Australia. The main problems seem to stem from two, separate, pieces of legislation / regulation. For housing loans, as discussed earlier, there is the double stamp duty problem. In Victoria, at least, this problem has been dealt with. I believe that it has not been dealt with in other jurisdictions.

The other problem is the Australian prudential regulations, administered by APRA. These follow the current, Basel I, standards and are in the process of changing over to the Basel II standards. Neither of these makes provision for Sharia compliance. Both of the Accords treat these types of financial arrangements as equity, rather than credit – thus giving them a heavy capital treatment.

There may be a loophole, though, and one that is not well known. Read the rest of this entry »

The implementation in the US just seems to get more confusing. Currently, the 20 or so banks that the Fed judge to be internationally active will have to apply the Basel II advanced methods. Everyone else will have to apply a modified version of the current, Basel I standards – this modification is termed Basel IA in the US. Clear enough – if not consistent with the rest of the planet.

A fair enough, too, in a way. The whole Basel framework is only meant to apply to internationally active banks. If a bank is not internationally active, then there is no need, within the accord, to apply Basel at all. Read the rest of this entry »

Post a comment, ask a question – go for it.

Can anyone tell me whether retail banking needs grading philosophy and grade definition just like corporate? What about Master scale for PD, is it common to have seperate master scale for retail and corporate?

Most banks believe that because they can differentiate their risk at facility-level, there is not much point to develop more pooling criteria than what it is required in Basel. Therefore pooling tends to be fairly straight forward based on international best practice.

More over the page. Read the rest of this entry »

Just for those of us interested in the banking theory, combined with the abuse and heated argument that normally comes with it, a debate has been going on at Catallaxy for a long time now – the initial post was on 20 May and it is still going.

It started here on the subject of “Regulation and the future of payment cards” and continues here under the more appropriate “Free banking, gold standard and monetary policy thread” title.

Charge up the laptop batteries and settle down for a good few hours to get through it. It may be published one day.

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