(Vocus) December 3, 2009
According to a new survey sponsored by SunGard and conducted by InteDelta, a risk management consultancy, there is a wide variation in European banks’ preparedness for the implementation of Incremental Risk Charge (IRC).
In July 2009 The Bank of International Settlements’ (BIS) Basel Committee on Banking Supervision issued revised guidelines for the charging of capital for incremental risk on the trading book. Under the new IRC guidelines, banks are required to hold capital to a one-year time horizon to a confidence level of 99.9%, considerably above the 10 day 99% Value at Risk (VaR) used for day-to-day market risk management purposes.
The implementation of IRC is likely to prompt a significant change in the behavior of European banks. The SunGard/InteDelta survey, which questioned executives directly responsible for IRC modeling at a number of major European banks, found that 64% expected the guidelines would have a significant impact - with IRC being a major disincentive to holding risky credit assets on the trading book. Other findings include:
- 55% of respondents anticipated that the implementation of IRC would lead to a significant increase in capital. Many highlighted certain products whose profitability and even viability may be threatened by the implementation of IRC. These included structured credit, corporate CDOs and correlation trading.
- Only 10% of those surveyed are in the implementation phase for IRC, with 40% still only at planning stage
- While 40% of those surveyed said that they were developing new models to react to the IRC guidelines, all the respondents said that they were incorporating regulatory principles into these models rather than choosing to adopt their own.
For full details of the survey, please click here.
Michael Bryant, managing director at InteDelta, commented: “This research echoes wider feedback that had been highlighted by the industry to the BIS over its IRC consultation period. While all questioned were supportive of the need for an IRC framework, the executives we interviewed raised many specific concerns regarding the rules. Banks are also struggling with aspects of the implementation such as modelling liquidity and obtaining reliable data.”
Mat Newman, head of product management for SunGard’s Adaptiv risk management solution, commented: “There’s not much time left for banks to prepare for this new charge so they need to move from planning to implementation soon. Critical in a project such as IRC, where the rules are changing and likely to evolve over time is a flexible analytics framework that can quickly incorporate new thinking and new methodologies. Our customers find that Adaptiv Analytics can provide a practical framework for a measure such as IRC, as it combines both market risk and credit risk capabilities in a single, scalable and flexible architecture.”
InteDelta is a risk management consultancy whose mission is to help financial institutions better manage their risk. Through our range of consulting and associated products we provide assistance in areas such as advising on policies and methodologies, systems implementations and conducting market intelligence.
Our areas of expertise cover the major risks faced by institutions: credit, market and operational risk, and we also have a number of more niche specialisms such as collateral management. Our clients range from some of the world's largest banks and asset managers to medium sized banks in developing markets, hedge funds, risk software vendors and other consultancies. To find out more visit http://www.intedelta.com
SunGard’s Adaptiv provides enterprise-wide credit and market risk management and operations solutions for financial services institutions. Adaptiv assists institutions of varying size and complexity to deploy technology to meet both internal and regulatory requirements for risk management and operational control. Adaptiv helps financial services institutions from the banking, hedge fund, asset management, insurance and corporate sectors with its deep understanding of risk management and operational processes.
SunGard is one of the world’s leading software and IT services companies. SunGard serves more than 25,000 customers in more than 70 countries.
SunGard provides software and processing solutions for financial services, higher education and the public sector. SunGard also provides disaster recovery services, managed IT services, information availability consulting services and business continuity management software.
With annual revenue exceeding $5 billion, SunGard is ranked 435 on the Fortune 500 and is the largest privately held business software and services company on the Forbes list of private businesses. Based on information compiled by Datamonitor*, SunGard is the third largest provider of business applications software after Oracle and SAP. Continuity, Insurance & Risk has recognized SunGard as service provider of the year an unprecedented six times. For more information, please visit SunGard at http://www.sungard.com.
*January 2009 Technology Vendors Financial Database Tracker http://www.datamonitor.com
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