After the credit crisis, back to counterparty confidence testing?

Hey remember that Basel II thing from back when our biggest concern was how are we going to make sure banking and finance in the "New World Order" of the global economy was all about finding a way to work via the Bank of International Settlements (BIS) in Basel, Switzerland to make counterparty credibility more transparent among banks operating in differing regulatory regimes? Those were the days.

Someday this credit crisis will pass. And then we'll need to get back to the nuts and bolts of counterparty confidence. What will that look like in a tomorrow where ratings agencies have been tainted, bank internal research based (IRB) risk assessments have been marked as alchemy, and the academic theories underlying the original Basel II thesis have passed through a catastrophic discontinuity in the models?

Certainly a topic worthy of discussion don't you think?

Tags: basel, counterparty, ii, risk

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Permalink Reply by Gary Schurman on March 25, 2009 at 10:09pm: Two comments:

1) With regards to ratings agencies - I think that what this crisis has told us is that if the agency doing the rating does not have their own capital at risk then their ratings are highly suspect.

2) As a big supporter of Basel II I believe that the academic theories underlying the original Basel II thesis are sound, its how the models were used that is suspect.; ▶ Reply to This

Permalink Reply by Dennis Santiago on April 2, 2009 at 1:32pm: Good points. Here are my observations.

1. What I actually learned about rating agencies from the crisis is the those that have beneficiary revenue at risk from their materially participation were the ones most vulnerable co-option. "Once upon a time, someone paid for a AAA rating for an engineered AAA tranche in an opaque illiquid complex subprime deal based on toxic collateral modeled not in detail but rather by looking up a pick list in a spreadsheet ... repeat refrain." Then one day, realization happens. Hey what filing cabinet did all that residual get stashed in again? LOL.

2. I too am a supporter Basel II. It's goals are lofty and worthy. It's original faithful reliance on now suspect external ratings agencies is in need of some soulful revisiting by bankers and regulators alike. The "advanced" Internal Ratings Based (IRB) approach was based on the very same modeling methods that got the financial system in so much trouble. I've always found it's hard to get academics to admit they made a mistake even when it's glaring. The culture is designed to promote argument not closure. On the business side of the world, execution is all about closure.

There are times when watching old eposides of Angel and seeing Wolfram and Hart letterhead can be amusing. There's one episode where the lawyer Lila goes to see the robot efficient girl in the basement who handles Files and Records. That girl is the actress who now does those Progressive Insurance commercials. That tickles me some.; ▶ Reply to This

Permalink Reply by Neil Robinson on March 26, 2009 at 6:50am: Good point, Dennis.

I think this reinforces my view of a central "wholesale" bank, a government owned body that deals with (and therefore guarantees) inter-bank payments along with other collaborative transactions.

I don't think the public will be able to trust banks -or their regulators - for some time to come and that will put the brakes on any restart of the economy.

Bank regulated payments under the guarantee schemes already planned would ensure a high degree of confidence and therefore compliance and would fall in line with the Basel model.; ▶ Reply to This

Permalink Reply by Dennis Santiago on April 2, 2009 at 1:40pm: I agree that the restoration of confidence is a critical element to impoving upon present conditions. At the Basel II level, it's a G20-wide confidence issue. It's going to be interesting to see how this works out particularly with US policy being on the stimulate your way out track and the other G19 not so sure we're sane.; ▶ Reply to This