Jennifer (see the previous post) pointed me to this presentation to the IAA’s annual conference by Dr. Mark Lawrence. While it breaks many of the rules I normally set for a group of slides it is one of the presentations I would like to have been at.

While I do not agree with all of it (he thinks that fair value accounting is an issue, for example), it makes a number of very good points – for example:

Regulators should support the private sector’s efforts to improve transparency, with particular reference to harmonization of disclosure requirements among different jurisdictions. The official sector should work closely with industry and market participants to improve market understanding of Pillar 3 disclosure content. Disclosure requirements should be based on a risk-and principles-based approach to qualitative as well as quantitative information

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In the view of many, culture is the single most important determinant of risk management effectiveness

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Risk Managers concerns [are] often pushed aside [ask HBOS about this one]…

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Capital models were originally created for important business purposes, and won’t go away …

Therefore, users (and supervisors) must understand very well the weaknesses and limitations of the these models:

  • exactly what is measured, and what is not
  • exactly what the models can and cannot be relied upon for
  • when they work (i.e., under what conditions) & when they don’t

It is worth at least a read. The point about understanding your capital models is crucial. They are not and will never be the be-all and end-all of risk management. Like any model they are only as good as the common sense pu

t behind them.