Moody's: Basel II Changes Should Strengthen Credit Risk Management

Moody's issued a special comment paper focusing on Basel II amendments already introduced, as well as statements from the Basel Committee on Banking Supervision (Risk.net). The paper highlights enhancements relating to a bank's trading book, securitization, and counterparty credit risk.

In particular, the recommendations involve strengthening Tier I capital, introducing tougher liquidity standards, including counter-cyclical provisioning, discussing systemic risk provisions (which is becoming popular in the United States), and including leverage ratios as a supplementary measure. Moody's also believes that proposed Capital Requirement Directive changes to the quality of capital and securitization were also a positive step.

In addition, the paper mentions that:

One important amendment calls for stricter operational requirements for credit analysis for banks holding securitisation exposures. We believe that the increased requirement for credit analysis for banks holding securitised exposures is going to be an important element of improved risk management, and should ensure that only banks with the necessary information and analytical tools hold securitised products.

Of course, it could also mean that less securitization takes place. While this may be the intended result, the unintended consequence of reducing the efficient flow of capital or not allowing those who want to off-load or bear risk access to the vehicles they need, will also need to be considered further - either now or later.

Comments

[bindlepete:]

Mark to market was a great , if not original, idea. If followed as was intended and even the law of the land, it could have saved us a lot of grief.

True it would have created a lot of grief for the less responsible fast buck artists, but then that is what was supposed to happen.

Now 'Ol Aunt Mini is on the hook for Lloyd Blankfien and Co. "Eat dirt Mini and keep greeting at Wally Mart, we still hold the caviar and can send our kids to Andover".

Sep 21 10:01 AM

[THofler:]

Thanks for an important update.

The worst thing that happened in the U.S. part of the crisis was the removal of the leverage caps at the request (demand?) of the Eurozone Basel II folks. The most rediculous thing that happened globally, is the hubris of the Basel II committee to think that a statistical VaR risk metric based on short histories was a superior way to regulate leverage, compared to leverage caps.

Sep 21 08:30 PM