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BASEL COMMITTEE - Holistic Risk Analytics & Stress Testing Principles

It's not just the "secretariat" in Basel scribbling out guidance which noone needs to read in the first paper I am citing here, look at the members of the committee which produced this document!!! There's a representative from nearly every significant Supervisor in the Globe. Does this mean that we have a new consensus from the current supervisory "overheid"? (Flemish term for government, which I think rings in English). Are they saying to us that Risk Analytics must be holistic i.e must integrate credit and market risk, that any financial institution needs to have an integrated risk management unit with oversight across the whole business reporting directly to the board - if the institution is going to be supervisorily acceptable? A nod is as good as a wink to a blind man but that's the way it looks from this paper.


The distinction between market and credit risk has been blurred by the development of credit risk transfer markets and the broad move to mark-to-market accounting for a wide variety of financial instruments. This has raised questions regarding approaches that treat the two types of risks separately. The financial crisis has illustrated how the two risks may reinforce each other and that in such stress situations illiquidity can exacerbate losses.

The working paper discusses the conceptual distinctions and empirical relationships between market and credit risk. It reviews issues related to aggregation and diversification benefits and discusses how market liquidity affects the relationship between market and credit risk.


This second paper re-inforces that analysis presented above. Its from Basel too.


Generally, firm-wide stress testing is an area that many banks recognise they will need to improve to ensure appropriate risk capture and to aggregate risk more effectively across business lines. The principles set forth in this paper are intended to support and reinforce efforts made by banks to improve their practices, but banks should not restrict themselves to a checklist approach to improvement.

Stress tests should cover a range of risks and business areas, including at the firm-wide level. A bank should be able to integrate effectively, in a meaningful fashion, across the range of its stress testing activities to deliver a complete picture of firm-wide risk.

A stress testing programme should consistently and comprehensively cover product-, business- and entity-specific views. Using a level of granularity appropriate to the purpose of the stress test, stress testing programmes should examine the effect of shocks across all relevant risk factors, taking into account interrelations among them.


See also My related literature review and IT development guidlines on a the DIY approach to ST which will have to come;-

P.S. "COMMITTEE" is a way of saying that word in Gaelic to express your suspicion of all things governmental or "overheid", if you get the point?

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