Dr. Tobias Volk (Deutsche Bundesbank) Speaks on Risk Management and Bank Supervision
FERNBACH held an event on ‘Optimising bank-wide risk management’ in Frankfurt am Main as part of the FlexFinance Analytix product rollout. Regulatory and consulting experts, as well as experts from the banking field itself presented varying perspectives on current regulations and their developments. As guest speaker, Dr. Tobias Volk, from the Deutsche Bundesbank, addressed the topic of ‘Risk Management and Bank Supervision’ and explained where supervisory bodies are concentrating their attention as well as breaking developments at the European level.
Instead, the requirements of Pillar II are going to be increased and made more precise. Dr. Volk then went on to explain the various European scenarios. The spectrum of requirements stretches from one extreme (e.g. the FSA, with its descriptive, formalised requirements) to the other (e.g. BaFin).
The aspects of the Basel framework with an international impact for the first pillar include IRB and AMA methods as well as recognition of rating agencies for the CSA. Group-wide ICAAP and economic capital models as well as centralised risk control and management are applicable for the second pillar. Country-specific common reporting and disclosure requirements are the third pillar’s most important aspects. Dr. Volk focused in particular on the second pillar and ICAAP reporting (internal process for ensuring a bank’s capital adequacy).
He also tackled COREP requirements; the conditions of which are compulsory in Slovenia and Luxembourg, but not in Germany. Because COREP is formulated on a country-by-country basis, France suggested that countryspecific COREP (Home Country COREP) be recognised. That should help create a uniform system architecture and help avoid internal problems.
Dr. Volk also touched on the De Larosière Report which details how regulatory supervision should be structured in Europe. In the short term, national supervisory authorities should become more independent and powers of discretion should be reduced. Although a stronger Europe-wide alignment should follow, the creation of a pan-European supervisory authority has been rejected. While the European Central Bank currently holds a macro-prudential role, it has no authority over individual institutes.
The Basel Committee has issued an addendum to its standards for risk management for consultation. The goal is to further specify the very general regulations set down in the second pillar. The detailed requirements will mostly affect the following areas:
- Risk concentration management
- Reputational risk management
- Liquidity risk management
- Use of stress tests
- Use of suitable processes for valuating structured products
The topic of current international stress tests was next on the agenda. The crisis has clearly shown that assumptions regarding management reactions are generally too optimistic.
Banks should run their own stress tests to find out where they are vulnerable. Dr. Volk emphasised that banks should also try to anticipate how to act under adverse circumstances and how to deal with any associated risks. This is considered to be more important than simply addressing requirements. Simple scaling is often insufficient. Value at risk and the confidence level, the risk measurement standards currently in use in the financial sector, are simply not enough. Recommendations are currently being formulated for the stress tests. Supervisory authorities will also continue to focus on stress tests in the future.
