The delights of Basle

Balance Sheet

ISSN: 0965-7967

Article publication date: 1 April 2000



(2000), "The delights of Basle", Balance Sheet, Vol. 8 No. 2.



Emerald Group Publishing Limited

Copyright © 2000, MCB UP Limited

The delights of Basle

The delights of Basle

Risk is at the heart of banking. But risk is a strange beast. And what the increasing armies of regulators want to know is the answer to one simple question: How do you measure the riskiness of banks' lending? Under the 1988 Basle Accord banks had minimum standards laid down for how much capital they had to set aside against their loans. But no one had thought of adding the extra ingredient ­ an assessment of how risky any of those loans were. Now we are back at the beginning again and trying to measure that riskiness.

We asked Peter Vipond of the British Bankers' Association, and a member of the Basle working party, to assess the reforms proposed. Whatever happens, he argues, credit will be pushed to the forefront of trading operations within firms. Banks will never be the same again.

His views are echoed by our columnists. Richard Cookson is The Economist's guru on risk and banking. Here he steps out from the anonymity of that publication and assesses the huge changes that the US market's changing attitudes toward debt and equity will have on the global marketplace. Also, Bill Robinson, newly installed national director of economics at PricewaterhouseCoopers, provides a sharp and incisive view of the current banking upheavals. All his experience in his old job as director of the Strategy and Policy team at London Economics is brought to bear on his long view of the financial world.

David Barnes and Neil Warman of Arthur Andersen show how the massive growth in securitisation in the US has moved across into the European market. The key to the future is, once more, the Basle proposals, and the authors offer their views on how the market will be changed as a result.

Liquidity is the key to financial markets and has become an increasing problem in a world where institutions, regulators and the very structure of the markets themselves are changing so rapidly. The epitome of global banking organisations, the Hong Kong and Shanghai Banking Corporation, went through a complex process of preparing itself for the worst that the millennium changes could bring. John DeLuca Jr, HSBC's senior manager of group asset and liability takes us through a fascinating case study of how the risk management team planned the operation, how they implemented the plans and how it worked.

Meanwhile the team at Credit Suisse First Boston responsible for implementing the new credit derivative definitions, laid down by the International Swaps and Dealers Association, talk through the experience. Their conclusions are heartening. They are convinced that the rapidly developing credit derivatives market will be boosted further by this new foundation on which the market can build.

Paul Kaye of CGU Global Risks also has his eyes on the future. He provides a swift guide to alternative risk transfer and sets out the advantages to be gained from it in terms of adding value for large corporates. In the same vein Tim Leech talks through the ways to approach management self-assessment when it comes to risk. Both Leech and Kaye have one goal in common ­ the leverage of value within an organisational structure.

Then it is back to the central theme of liquidity. Ross Jones is CEO of Gerrard and King and chairman of the London Money Markets Association. The recent talk he gave to the UK Asset and Liability Management Association (ALMA) set a number of cats among the pigeons. His views on future liquidity in the markets are not as optimistic as many reformers of market structures might hope. His analysis of the rapid changes of the last several years pulls no punches.

This is also the issue where we unveil closer ties with the UK ALMA. This month Joseph Mariathasan looks to the future and, in particular, to the next residential gathering of ALMA where e-commerce is to be the forward-looking theme.

John Machin, head of information risk management at KPMG, fills our 'Offshore' slot where we take a sideways glance at the wider issues of Balance Sheet's remit. He talks us through the issues involved in the battle between the IT revolution and boardroom evolution. His assessment is that IT risks are badly managed, and he provides some help and advice to change this perception.

And finally, in true apocalyptic style, we review the first book to take the lid off the collapse of the world's most famous and ultimately notorious hedge fund, Long-Term Capital Management. The story, like the organisation itself, is extraordinary. As ever in the world of risk management, there are numerous very basic lessons to be learned.

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