FRB: Speech, Bies--Sound Capital and Risk Management--March 29, 2006

If you are in a Money and Banking class, this one should not be missed! Today's speech by Fed Governor Susan Schmidt Bies.

FRB: Speech, Bies--Sound Capital and Risk Management--March 29, 2006

A few look-ins:

"...with the advent of very large banking organizations that engage in a wide variety of business activities--some of them quite complex--the Federal Reserve has become even more interested in ensuring that banking organizations understand the risks of these activities."

later:

"To conduct a credible internal analysis of relevant risks, institutions should identify which risks can generally be quantified and which ones cannot. When risk measurements are based on scarce or incomplete data, or on unproven quantitative tools, institutions might need to use sensitivity analyses, stress tests, or scenario analyses to a greater extent in order to develop meaningful risk measures."

Why Basel II matters:

"One of the most important sound practices for a banking organization is the tying of risk exposures to capital. Banks that use similar risk models can have very different risk exposures. That is why the Basel II approach to capital is so important. Basel II provides a framework in which the risk level banks choose to accept is reflected in their capital."

It is not just interest rate exposure!

"Focusing now on operational risk, one of the most substantial changes in the U.S. banking industry in recent years is the movement of the largest organizations toward fee-based revenue streams. These new activities include securitizing loan portfolios, with the bank retaining responsibility for loan servicing; buying and selling financial instruments for customers; and other business lines that generate revenue by charging customers transaction and account processing fees. These activities generate little balance-sheet exposure, but they present the potential for large losses if the complex systems and financial deals associated with them are not managed in a sound manner"

And finally, what is the current status:

"Now I would like to give a brief update on where we stand with implementing Basel II in the United States, as well as with amending the current Basel I regime. First of all, you may have heard that tomorrow the Federal Reserve Board plans to review a draft of the interagency Basel II notice of proposed rulemaking (NPR) at a public meeting, meaning that a draft NPR will also be made available to the public at that time. The final NPR is expected to be issued in the Federal Register after all of the U.S. banking agencies complete their review and approval processes, meaning it will then be "officially" out for comment."

It's almost like being there ;)