Basel expert speaks

Basel expert speaks

Financial risk management has experienced enormous improvements in the last 20 years both from theoretical (risk measurement) and practical (risk management) point of view.

Nowadays there are much higher standards on risk management practices all around the world. The recent regulations like Basel II capital accord and its various national implementations have also created prosperity for risk management developments. Needless to say, that the subprime crisis and the current global (financial) crisis also made risk management a hot topic in all financial institutions.

The new Basel II regulation realized that the former one-size-fits-all 8% capital adequacy ratio does not necessarily provide a safe buffer to absorb the unexpected losses for each of the banks, especially not in extreme circumstances. The capital requirement should be more risk sensitive, should be more align to the real risk taken by the financial firms. Only a more risk sensitive capital can provide enough confidence to the external investors, rating agencies and can protect the depositors.

Basel II gives options for the banks to choose risk measurement methods that are most appropriate to the stage of their development and the financial market in which they are operating. Basel II also recognized the importance of some „new” risk types which were not taken into account in previous regulations, like operational risk or interest rate risk in the banking book.

Basel II is not only about how to calculate the minimum capital requirement, but much more. In its second Pillar it puts emphasize on the every-day risk management practices as well. Banks should always be aware of all the risks they run, and should have sound processes to manage (monitor and control) them. They should also calculate their economic capital requirement which ensures that they remain going concern under adverse conditions taken into account all material risks (e.g. liquidity risk, reputational risk, etc.).

Loxon Basel II/III calculation engine simply helps you to be a better bank. With our system you can meet all of the high-risk management standards set up by Basel II both from Pillar I and Pillar II point of view. More importantly we think that banks with better risk management can be more competitive. They can be much more precise in risk-based pricing, conscious in steering their portfolios. They will also be able to maximize their risk-adjusted performance through more sophisticated capital allocation. At the end of the day they will be more prudent and profitable.

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