Short speech that Nout Wellink of the Netherlands Central Bank will be making later today in Paris has just popped up on the BIS website. It makes a few good points around how the risk management practices being improved through Basel II will improve the resilience of financial institutions and the system generally. Might not be worth a full read, unless you like that sort of thing but a few points bear repeating.
Nout was clear on the importance of the Pillar III disclosures – “Pillar 3 will become more important because of increasing intermediation of risk through the capital markets.” In the context of the draft Pillar III disclosures that APRA released in the new APS 330 I can only repeat what I said at the time – they are inadequate. Banks and other ADIs going standardised and seeking cheaper funding would be well advised to make fuller disclosure than required.
The US regulators (hello – that is you FDIC) –
A regulatory framework based on a simple risk weight scheme has become less and less effective in assessing an appropriate level of regulatory capital against these new, complex risk exposures.
To extend the point beyond Nout’s – the old ways of calculating risk exposures do not work. Trying to impose them in this context is simply wrong. Financial institutions need to be able to fail. Trying to make sure they cannot, as the FDIC seems to be trying to do is merely a recipe for the whole sector to become a moribund wasteland of zombies, too afraid to do anything new. Not an attractive prospect.
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