The Basel’s 3.5 Fundamental Review of the Market Risk Framework: A flexible approach to solve hidden flaws and achieve consistency
In order to improve the resilience of the banking system and harmonise its Minimum Capital Requirements (MCR), the Basel Committee of Banking Supervision (BCBS) has embarked on a thorough revision of the Basel III Capital Accord proposing radical changes in the market risk framework, both for the Standardised (SA) and the Internal Models Approaches (IMA). The modifications, collectively known as Basel 3.5, revamp the former introducing many risk-oriented elements and different treatment across assets and the latter adopting the Expected Shortfall instead of Value-at-Risk as the official market risk measure, with stressed calibration and tougher validation standards.
However, despite the healthy reinforcement of the capital base, the BCBS has not achieved the desired convergence between SA and IMA, thus generating dangerous imbalances and adverse incentives for banks embracing the latter in view of its higher MCR. Consequently, the identification of the variables capable of restoring the equilibrium between the two appraisals acquires paramount relevance. In this sense, the study delves into the SA and spots several key areas susceptible of softening the impact that its rigidity exerts on the banks’ accounts, and furthermore discovers the possibility to work on the design of the IMA to extend the applicability of the appraisal and enhance its depth.
The alternatives hereby put forward entail a great deal of flexibility to BCBS’s mandate, and would allow the calibration of several parameters in accordance with the particular patterns of the markets subject to them. Likewise, its adaptability could reduce excessive capital levels or increase insufficient ones, simultaneously safeguarding the solvency by providing substantial coverage against significant market slumps.
Biography
Dr. Adrián Rossignolo holds a Ph.D. and a M.Sc. in Finance with distinction from the University of Leicester (United Kingdom), and received a Bachelor of Science (B.Sc.) degree in Actuarial Sciences magna cum laude, from the University of Buenos Aires (Argentina). He has been working for over 20 years on actuarial sciences and operations, financial risk assessment and portfolio management in private sector companies. Additionally, he has devoted time to research, teaching, publishing and refereeing activities in the United Kingdom and Argentina.
His areas of expertise include the quantification and management of market risk exposures, portfolio management, application of insurance and banking regulatory directives, identification, and measurement of market, operational and liquidity risks exposures, design of life insurance and reinsurance coverages, underwriting policies and claims administration.
Throughout his career in finance and actuarial management, he has been serving as Portfolio Manager and Actuarial, Reinsurance, Underwriting and Claims Manager. He also became a Member of the International Finance and Banking Society and Fellow of the London Institute of Financial Services in the United Kingdom.
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