Comments on: Dodd-Frank vs Basel III A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: HCLR Mon, 31 Oct 2011 10:45:14 +0000 Thanks for your post, Thomson Reuters Risk Management has also written an interesting article on Basel III on its blog, Risk in the Market m/2011/basel-iii/

By: Strachnyi Thu, 24 Feb 2011 01:45:45 +0000 Thank you for the post! Great article!

For a concise summary of Basel II vs. Basel III see the following link:

By: PerKurowski Sat, 22 Jan 2011 01:43:01 +0000 What the article does not make fully clear though is the role of the regulators.

It is perfectly normal that bankers believe they can master risks of default. Who would want to deal with a banker who does not believe so? … And it is the role of the regulators to tell the bankers “No you can’t… and besides there are so many other risks to be considered than just avoiding the defaults of your clients and the defaults of yourselves”.

What really created the crisis was that the regulators themselves had a go at it like risk-managers when imposing their own very arbitrary risk-weights.

A credit rating sends out on its own a very positive or negative signal to the market. When regulators based the capital requirements of banks on those same credit ratings, they dramatically augmented the strength of those signals… to such an extent that banks went and drowned themselves in triple-A rated waters wearing no capital at all… to such an extent that lending to the “risky” small businesses and entrepreneurs has come to a halt because that requires too much capital, especially when bank capital is very scarce as a result of having invested or lent too much to the ex-ante “not risky”.

What the regulators have not understood is that the risk that they are in charge of is not the risk covered by the credit ratings but the risk of how the banks might act upon those credit ratings… which includes of course the banks going excessively into areas where suddenly the credit ratings could turn out to be wrong.

Currently the regulators, who totally failed as risk-managers in handling some simple risks of defaults, by foolishly playing around with capital requirements based on perceived risks that ignoring that systemic crisis never ever results from timely perceived risks… are now arrogantly tackling even much more God-like events like pro-cyclicality. God help us!

Please see the video and help me to voice the message 2010/09/financial-crisis-simple-why-and- what-to.html

By: Kamekon Fri, 21 Jan 2011 21:55:11 +0000 The PD/LGD approach isn’t discredited at all (and I’m not sure why you “hope” it would be): in fact, it is at the heart of the IRB approach under Basel II, and Basel III doesn’t change that. See in particular section II (Risk Coverage) of

By: KenG_CA Thu, 20 Jan 2011 20:26:29 +0000 Conservative risk ratios is not dumb regulation, it is the only reliable tool for preventing instability. Risk can not be accurately predicted, so depending on those predictions is asking for problems that are guaranteed to happen when the forecasts are wrong.

Ratios should be used to control growth, instead of interest rates. When growth is higher than the economy can sustain (i.e., demand exceeds supply, causing inflation), then capital ratios can be increased. This should be done anyway, as risk of big failures is amplified during high growth periods, when over-leverage combined with arrogance yields disaster.

By: hsvkitty Thu, 20 Jan 2011 18:56:15 +0000 Thanks for having me reread the well written Wired article. It’s one of the reasons I came to your blog.

End of article quote…As Li himself said of his own model: “The most dangerous part is when people believe everything coming out of it.”