Comments on: Is Ireland’s problem a Basel problem? http://blogs.reuters.com/felix-salmon/2010/11/24/is-irelands-problem-a-basel-problem/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: drewiepe http://blogs.reuters.com/felix-salmon/2010/11/24/is-irelands-problem-a-basel-problem/comment-page-1/#comment-21456 Fri, 03 Dec 2010 14:03:26 +0000 http://blogs.reuters.com/felix-salmon/?p=6304#comment-21456 “In general, banks reduce their ratio of risk-weighted assets to total assets in one of three ways. They can be heavily involved in investment banking, where loans tend to be taken out in the repo market and are fully collateralized; they can be heavily invested in structured products with triple-A credit ratings; or they can be heavily exposed to OECD sovereign credits.”

What. On. Earth. Are. You. Talking. About?

You’ve never worked in a bank, I presume?

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By: pereiraarvindin http://blogs.reuters.com/felix-salmon/2010/11/24/is-irelands-problem-a-basel-problem/comment-page-1/#comment-21304 Fri, 26 Nov 2010 18:03:00 +0000 http://blogs.reuters.com/felix-salmon/?p=6304#comment-21304 yes, its better to have stringent norms and controls.

Arvind Pereira
http://www.ArvindLeoPereira.co.nr

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By: Greycap http://blogs.reuters.com/felix-salmon/2010/11/24/is-irelands-problem-a-basel-problem/comment-page-1/#comment-21280 Thu, 25 Nov 2010 14:55:05 +0000 http://blogs.reuters.com/felix-salmon/?p=6304#comment-21280 Thanks for that information, WaxLyrical.

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By: WaxLyrical http://blogs.reuters.com/felix-salmon/2010/11/24/is-irelands-problem-a-basel-problem/comment-page-1/#comment-21269 Wed, 24 Nov 2010 23:04:11 +0000 http://blogs.reuters.com/felix-salmon/?p=6304#comment-21269 If only Basel II were so simple! Some loans for the Irish banks would use the standardised Basel approach, while others would use internal (IRB) models.

On the standardised approach, the Irish authorities took some more prudent measures on the introduction of Basel II, given the property market was already quite hot in the lead up to Basel II implementation. Residential mortgages would be allowed a 35% risk weighting (in line with the Basel II standard), but the Irish regulator indicated (http://www.financialregulator.ie/indust ry-sectors/credit-institutions/superviso ry-disclosures/Documents/Implementation% 20of%20the%20CRD.pdf) that for loans with a loan-to-value greater than 75%, the portion over 75% LTV would need to be risk weighted at 75% or 100% (depending on conditions met).

Residential investor mortgages or second homes are risk weighted at 75% or 100% (again depending on conditions). Commercial property and property development loans were 100% risk weighted However, loans for land acquisition or if a planned development did not have 50% pre-lets by value were designated as “specialist lending” under the Basel II rules and were 150% risk weighted. If the borrower could provide alternative security or access to other cashflows to repay the loan it could keep a 100% risk weight.

Where the Irish banks had IRB models, as far as I understand they were not as procyclical as those of their closest peers (some aspect of the “through-the-cycle built in).

Also on Bank of Ireland, it has a significant mortgage and business lending book in the UK as well as an international corporate lending book.

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By: Greycap http://blogs.reuters.com/felix-salmon/2010/11/24/is-irelands-problem-a-basel-problem/comment-page-1/#comment-21262 Wed, 24 Nov 2010 16:40:35 +0000 http://blogs.reuters.com/felix-salmon/?p=6304#comment-21262 “… property loans, which tend to carry a full risk weighting”

Well, their *current*, manifest difficulties are due to commercial property loans. Para 74 of Basel II says these should be weighted at 100% … but the footnote allows this to be reduced to 50%, essentially at the discretion of the national regulator. So the strength of this “tendency” is determined by the CEBS.

And residential mortgages represent the bulk of future, unknown losses that are influencing market expectations. These are weighted at 35% – para 72.

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By: Eric_H http://blogs.reuters.com/felix-salmon/2010/11/24/is-irelands-problem-a-basel-problem/comment-page-1/#comment-21259 Wed, 24 Nov 2010 15:36:27 +0000 http://blogs.reuters.com/felix-salmon/?p=6304#comment-21259 Great post. To put it more succinctly, total assets are risk-weighted assets where everything on the balance sheet gets a 100% weight and everything else gets a 0% weight (or a variation with some weight for off-balance-sheet exposures). How can that possibly be better than a more risk-sensitive weighting system, properly implemented and supervised?

The “properly implemented and supervised” proviso pertains to both. We have plenty of past experience with failed leverage ratio systems.

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