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Having completed the discussion below on the implications for
banks, perhaps a quick discussion on the implications for the
non-financial services companies is in order. In Australia, as with the
rest of the (IAS 39 – FAS 133 is quite similar) world, the main
impacts for the resources and industrial companies were quite different
for those of the banks, largely due to the differing structures of the
businesses and what had gone before.
The important thing to note is that, unlike the banks, each and every company here was different, so the below are fairly gross generalisations which may be true overall, but are unlikely to be correct in any specific instance. Read the rest of this entry »
Now that most (or hopefully all) the banks in Australia have now completed their AASB139 implementation projects, perhaps it is time for a look back to see where the major challenges were. Considering that many of our neighbours to the near north are about to go through the same process, some guidance and assistance would be in order. Those needing to look at FAS 133 can also read on – the effects are very much the same. Read the rest of this entry »
The debate currently going on in the US over the way that the Basel II accord is going to affect bank capital levels is being replicated, in one form or another, all over the world (or at least the parts implementing Basel II).
Regulators realise that the current, Basel I, standards are risk insensitive. This means that banks can indulge in regulatory arbitrage to increase both risk and, hopefully, return without having to be hit by increased capital requirements. Indeed, some of the ways it can be done will both increase risk and reduce capital requirements.
Basel II addresses this, to a great extent, by its more risk sensitive measures. Even in the Standardised version there is an improvement in risk sensitivity, with the more advanced measures being even better. Read the rest of this entry »
The Premier of New South Wales, in an unwise fit of populism, has implicitly threatened Westpac that, if they dare to offshore some of their operations then this “would be taken into consideration” when their contracts are up for renegotiation.
This sort of threat is both bad for business generally, but also bad for New South Wales – even the threat means that companies will have to price in some political risk if they are to do business with the NSW government in the future. Having a government trying to make companies make business decisions on the basis of politics is unwise, at best.
A healthy reminder from the US on the dangers of hedge funds and the importance of monitoring star traders, with the near collapse of Amaranth, who were making huge, unhedged, bets on the natural gas futures market. Losses apparently total about USD6bn.
The good thing, though, is the smooth reaction to this one. As a result of the collapse of LTCM in 1998, where many banks got their fingers burnt, a number of changes have been put in place, notably in lending policies. These seem to have worked. LTCM’s losses were around USD4.6bn. Inflation adjusted, that is about the same as the losses here – yet the Fed has not had to get involved and no banks are reporting problems.
Let’s hope this is not seen as an excuse to regulate hedge funds, but a reminder to all that if you play with fire, you risk getting your fingers burnt.
To follow up on our earlier post on Basel II use tests – the BCBS yesterday released a set of 4 principles in their latest newsletter, called “The IRB Use Test: Background and Implementation“.
To be honest, the principles are fairly generic and if you use tests are not complying with these principles already then calling them a use test is probably incorrect. Read the rest of this entry »
One aspect of operational risk that is often missed is the effects on banks of a pandemic. This is just the sort of “long tail” statistical event that VaR modelling will miss. As happened with the SARS epidemic in South-East and East Asia a few years ago, a contageous disease outbreak will cause some very unusual effects. How would your bank or company cope with a serious influenza pandemic, for example?
A simulation being run over the next few months in London is a good step towards ensuring that a pandemic is not going to completely cripple the financial system, multiplying what would have been a serious problem, with tragic effects for those directly affected, into a global crisis. Read the rest of this entry »
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