Resources for Basel II Capital Accord (Basel II)

Basel II – sound risk management is more than mathematics, says FDIC’s Bair

www.chasecooper.com

In a speech to the Global Association of Risk Professionals in New York on Tuesday, Sheila Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC), called for a back to basics approach in risk management, stating that, on their own, the mathematical modeling of the Advanced Approaches of Basel II was not the solution.

In illustrating the difference a year has made in the finance markets, Bair said we had moved from a highly liquid market, with high bank profits, apparently solid AAA CDOs and where many people believed the capital calculated from the quantitative models underlying the advanced approach of Basel II accurately reflected the risk. The view was that triple-A ratings bonds equated to minimal or no risk at all. Today over 1,200 triple-A-rated CDOs have been downgraded, many by multiple notches, US house prices have fallen by 8.4 percent in the year and US bank profits have taken significant hits from sub-prime restatements.

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