RBNZ says bank managers and directors generally better placed to design mortgage lending risk management systems than regulators

RBNZ says bank managers and directors generally better placed to design mortgage lending risk management systems than regulators

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RBNZ says bank managers and directors generally better placed to design mortgage lending risk management systems than regulators

How well did that work out in Australia? Not to mention Germany.

When math starts to go bad, banks often face only stark and confusing (to the outside) decisions: let RWA’s rise and be forced to raise more capital at a time when questions about banks “having” to raise capital may make it more difficult and perhaps dangerous (Deutsche), or try to “earn” your way out by drastically shrinking operations and cutting back marginal resources before the auditors and regulators start questioning why your math doesn’t conform. Read more

I've said for a long time banks do not have people who can actually carry out a competent risk assessment.

You also left out https://en.wikipedia.org/wiki/Lehman_Brothers they did some quality risk assessment.

One of the criticisms of the banks pre-GFC was that they used quants (ex Soviet rocket scientists and the like) to develop these models for assessing risk. The quants knew the limitations of the models - but the bankers didn't - and the bankers would plug in numbers and out would come results - all was good - we know how that ended.

GIGO

The mathematics is fine. Like any sophisticated modelling the user needs to be an expert in that field to produce meaningful results. Of course LTCM took it to extremes with their limited data set and they should have known better.

Yep, John Merriwether's clan should have known better, but that's not how one makes extraordinary money using other people's money.

No doubt the maths was fine - just the assumptions were wrong. It's all about the assumptions.

Double post :-)

The model employed was called VaR - from memory Value at Risk analysis was introduced by JP Morgan in 1995. The boffins were generally US PhD's from exclusive US universities. Well those working at my US bank in London certainly were. Traders were aware of the finer nuances since they generally had maths firsts from Oxbridge.

“Self-regulation is oxymoronic.” “Regulators must regulate, not delegate.