Seeking the silver lining in the thunderstorm of regulation

Balance Sheet

ISSN: 0965-7967

Article publication date: 1 September 2004



Bruce, R. (2004), "Seeking the silver lining in the thunderstorm of regulation", Balance Sheet, Vol. 12 No. 4.



Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited

Seeking the silver lining in the thunderstorm of regulation

Conversations in the world of asset and liability management have tended to concentrate on the nightmare of regulation. Worried knots of people in the bars after yet another conference on Basel or SarBox talk of little else. The essence of such conversations covers two strands. The first is that the regulators do not have a true understanding and hence do not have a true grasp of the real effects of what they are imposing. The second strand is that a whole world of unintended consequences is opening up all around.

But there is increasingly a third strand which is becoming apparent. And this is where the silver lining of our headline comes in. Once the detail of the regulation has been digested good professionals in the world of asset and liability management start, as they should, to concentrate on the opportunities. This is precisely what you would expect. The world of asset and liability management is, if nothing else, all about finding competitive advantages, sometimes in the most unlikely of places.

Take our column from Matthew Leitch in this issue of Balance Sheet, for example. He talks you through a case study and suggests that complying with the Sarbanes-Oxley legislation can be a relatively short operation. Once the fears and uncertainties are cleared away a simpler approach can be adopted.

Or take our column from Bill Robinson. He provides exactly what the current climate requires – a clear-headed guise to Basel II. And he shows that if you manage to keep a clear head then you will find all manner of opportunities are there to me explored. "A more important result of Basel II", he suggests, "is the more efficient allocation of scarce capital. This is a micro-economic effect which is unquantifiable, but certainly positive, and probably significantly so".

This theme of seeking the silver lining is then taken up by Kai Leifert, Head of Risk Management Germany at Credit Suisse Asset Management. He looks at the recent derivatives ordinance implemented in Germany and suggests that while it is a challenge it is also an opportunity. The treatment of operational risk is one of the winners, he suggests, and he argues that the lessons are there for everyone, not just those working within the German marketplace.

Richard Tschemernjak, Managing Director of Algorithmics Incorporated, points out similar opportunities in his stimulating article. He concludes that the long-term effects of Basel II will mean: "enhanced risk-based transfer pricing, more effective management of economic capital, greater transparency for both shareholders and regulators, and greater leverage of banks' people, systems and technology". That would seem to cover enough of a silver lining.

While it is not part of the great Basel II effect Eric Melse comes up with equally challenging and thoughtful analysis as he shows how multi-dimensional and color-coded analysis of balance sheets can produce extraordinary results. These enable a steadily widening view of the possible data that becomes available. His model allows a focus on trends which were previously undetected, exposing, for example, "latent variables hidden in the data".

Joseph Mariathasan, a leading light in the UK Asset and Liability Management Association, adopts a similar theme when looking at bond indices. He provides a guide to the complexities involved. "Users should be aware", he argues, "of both the fundamental differences in the philosophical underpinnings of bond indices as well as their practical implementation that make them very different animals to their equity relations".

The UK ALMA has plans to expand its influence. And one of the things which will provide a firm foundation to this aim is an expansion of its training. Jim Byrne, who is the expert in this field, provides us with a guide to how this will come about.

Elsewhere in this issue Balance Sheet provides the balanced coverage that our readers require. Amin Mawji of Ernst & Young takes a look, off the back of his recently published book, at the risk management of long-term projects. Chris Gentle of Deloitte provides a perceptive column on the opportunities which offshoring in the financial services industry can provide. And Michael Mainelli, as ever, has "the last word". And on this occasion he shows how product control at investment banks should be handled. And like everything else in this issue of Balance Sheet he is talking about how to seek out the opportunities and avoid the bleaker outlook of relentless regulatory toil.

Robert BruceEditor

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