“Basel not so NIMMble”
Jean-Marc Schwob, product manager at SunGard, feels that BCBS’ proposed non-internal model method goes wide off the mark with a one-size, fits-all approach. August 16, 2013 | Jean-Marc SchwobThe Basel Committee on Banking Supervision (BCBS) recently released a consultative paper, bcbs254, addressing the ways banks measure counterparty exposure, which proposes a new method under the name of ‘non-internal model method’ (NIMM).This method is a departure from current methods of calculating exposure and poses a number of challenges for banks that will be required to use it. One size fits all? Currently, most banks use the old "Current Exposure Method", which is recognised within the industry as being very basic. BCBS wants to do better, and the NIMM is their proposal to improve risk sensitivity for banks using prescribed parameters to measure counterparty exposures. But their proposals come with several shortcomings. The first shortcoming centres on capital requirements. The NIMM may well force banks to put aside more capital, particularly for unsecured over-the-counter (OTC) derivatives. When banks using standardised models compete with international banks using the more sophisticated Internal Model Method (IMM), they may be at an even greater disadvantage in the new NIMM world. There’s a hole in my bucket Current methods measure exposures at a trade level, and aggregate them after making some adjustments for netting. NIMMs require the bank to put trades into hedging sets, ‘bucketing’ trades into subsets of transactions within asset classes that share common attributes. Calculations are then made on the basis of the net position within each set. The five asset classes are interest rates, foreign exchange, credit, equities and commodities. This approach has serious issues, however. The arbitrary allocation of trades to hedging sets remains crude. For example, in the foreign exchange set, banks are only allowed to offset within a currency pair bucket – not between different currency pairs: for interest rates, only trades in the same currency can be offset – there is n... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Markets & Exchanges, Regulation, Risk & Compliance, Risk and RegulationMarkets Exchanges,riskregulation,Risk & Compliance,Risk and Regulation, Markets & Exchanges,Regulation,Risk & Compliance,Risk and Regulation, Keywords:Jean-Marc Schwob, SunGard, BCBS, Counterparty Exposure, NIMM, IMM Jean-Marc Schwob, SunGard, BCBS, Counterparty Exposure, NIMM, IMM
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