Kretzschmar, Gavin Lee
[VerfasserIn]
;
McNeil, Alexander J.
[Sonstige Person, Familie und Körperschaft];
Kirchner, Axel
[Sonstige Person, Familie und Körperschaft]
Integrated Capital Adequacy Principles for Institutional, Asset and Economic Risk Factor Stress Testing
Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 13, 2009 erstellt
Beschreibung:
It has become fashionable to blame global banking failures on the unfettered growth in 'hard to value and hard to sell' level 3 banking assets. With the majority of large UK and many US banks collapsing or forced to raise capital over the 2007-9 period, blaming bankers may be satisfying but is patently insufficient. Regulators, Basel II Pillar 2 and IFRS 7 guidelines also deserve justifiable criticism for failures in systemic oversight. Distinguishing macro from micro prudential shortfalls while simultaneously integrating their risk effects across asset classes and economic capital is central to understanding the banking crisis.Asset growth has taken place in a regulatory environment lacking in at least two critical prudential respects. Firstly, overall (macro) leverage of systemically relevant institutions is not modelled, nor is there a requirement to model leverage at an institutional (micro) level. Secondly, there is no institutional regulatory guidance as to the most robust methodology for linking systemic asset stresses to economic capital. We propose the Pillar 2 inclusion of a 'integrated institutional economic capital risk framework', arguing that macro prudential oversight should be viewed by regulators as a necessary precondition for institutional (micro) stability.A 'Euro bank' balance sheet is used to compare the capital effects of modular and scenario-based methodologies for dealing with institutional risks, both are allowable by Basel II regulations. The widespread use by practitioners of the modular covariance approach to Pillar 2 stress testing is not fit for purpose, it is methodologically flawed and is open to management 'tweaking' and manipulation, underestimating capital by about 20 percent. By contrast, the application of integrated calibrated economic scenario principles increases our quantitative and qualitative understanding of institutional capital calculations and risk path dependencies. We leave open the question as to whether the 'regulatory will' exists to distinguish macro from micro prudential responsibility