The responsive approach by the Basel Committee (on Banking Supervision) to regulation: Meta risk regulation, the Internal Ratings Based Approaches and the Advanced Measurement Approaches.

Ojo, Marianne (2009): The responsive approach by the Basel Committee (on Banking Supervision) to regulation: Meta risk regulation, the Internal Ratings Based Approaches and the Advanced Measurement Approaches.

Abstract

The use of complex and sophisticated financial instruments, such as derivatives, in the modern financial environment, has triggered the emergence of new forms of risks. As well as the need to manage such types of risks, this paper investigates developments which have instigated the Basel Committee in developing advanced risk management techniques such as the Internal Ratings Based (IRB) approaches and the Advanced Measurement Approaches (AMA). Developments since the inception of the 1988 Basel Capital Accord have not only led to growing realisation that new forms of risks have emerged, but that previously existing and managed forms require further redress. Basel II has evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risk within firms. This paper attempts to illustrate the extent to which the Basel II Capital Accord has responded to global and financial developments and concludes on the basis of available research evidence, that given the difficulties attributed to the constantly evolving nature of risk and the need for regulators to remain one step ahead, that Basel II, to an extent, has been responsive in meeting with regulatory demands. However, the existence of unregulated instruments such as hedge funds still implies that, despite its advancements and achievements, the Basel Committee still faces uphill challenges in its efforts to address and regulate risks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Basel; Committee; bank; regulation; AMA; IRB; risk
• Subjects: K - Law and Economics > K2 - Regulation and Business Law

References

Basle bust“ The Economist April 13th 2000

Basel II: Minimum Capital Requirements’ http://www.bundesbank.de/bankenaufsicht/bankenaufsicht_basel_saeule1.en.php

Basel II: AMA Approval procedure’ http://www.bundesbank.de/bankenaufsicht/bankenaufsicht_basel_zulassungama.en.php

Basel Committee on Banking Supervision, Consultative Document, Standard Approach to Credit Risk, Supporting Document to the New Basel Accord at page 1 January 2001 <http://www.bis.org/publ/bcbsca04.pdf>

Capital Requirements and Bank Behaviour: The Impact of the Basel Accord’ Basel Committee on Banking Supervision Working Papers April 1999

Carvajal A and others ‚ The Perimeter of Financial Regulation’ (2009) SPN/09/07 at page 4 of 17 http://www.imf.org/external/pubs/ft/spn/2009/spn0907.pdf

Commission Staff Working Document accompanying document to the Proposal for a Directive of the European Parliament and of the Council amending Capital Requirements Directive on trading book, securitization issues and remuneration policies, July 2009

Consultative Paper on a New Capital Adequacy Framework“ June 1999 < http://www.bis.org/press/p990603.htm>

Consultative Document on “Operational Risk” January 2001 Bank For International Settlements < http://www.bis.org/publ/bcbsca07.pdf

Gray J and Hamilton J, Implementing Financial Regulation: Theory and Practice (2006) Capital Requirements and Bank Behaviour: The Impact of the Basle Accord“ Basle Committee on Banking Supervision Working Papers No 1 April 1999 at page 1 < http://www.bis.org/publ/bcbs_wp1.pdf?noframes=1> (last visited 31 July 2009)

Haines F, ‘Regulatory Failures and Regulatory Solutions: A Characteristic Analysis of the Aftermath of Disaster’, Law and Social Inquiry (2009) 30 at page 3; also see C Parker The Open Corporation: Effective Self-Regulation and Democracy 2002 Cambridge: Cambridge University Press

Saidenberg M and Schuermann T‚The New Basel Capital Accord and Questions for Research (2003) Wharton Financial Institutions Center Working Paper 2003

Saunders A and Allen L, ‘Credit Risk Measurement: New Approaches to Value at Risk and Other Paradigms’ Second Edition Wiley Publishers

Supervision of Financial Services in the OECD Area: Financial groups, financial convergence and prudential supervision’ page 4 < http://www.oecd.org/dataoecd/29/27/1939320.pdf>

Tarullo D,Banking on Basel: The Future of International Financial Regulation Peterson Institute for International Economics

The Fundamental Principles of Financial Regulation: Geneva Reports on the World Economy 11’, Preliminary Draft 2009

The Internal Ratings Based Approach’, Supporting Document to the New Basel Capital Accord 2001 http://www.bis.org/publ/bcbsca05.pdf

Observed Range of Practice in Key Elements of Advanced Measurement Approaches (AMA)” October 2006 Bank for International Settlements http://www.bis.org/publ/bcbs131.pdf?noframes=1

Overview of the Amendment to the Capital Accord to Incorporate Market Risks: The Use of Internal Models for Supervisory Purposes/ Treatment of Specific Risks’ Basel Committee on Banking Supervision, Committees at the Bank for International Settlement Jan 1996