New speech by Haldane and WP by Borio
January 19, 2012
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As always something interesting when Andrew Haldane from Bank of England is giving a speech. These remarks, on accounting reform, are quite timely, as banks solvency are in doubt and the Basel Committee is discussion the future of the trading book regime. Haldane argues that “nothing less than radical rethink is required” and notes in particular some promising developments in valuing bank’s fair value asset and the implementation of the net stable asset regime to make banks more robust to sudden liquidity runs (and thereby switching from going to gone concern overnight). He notes that FSA has issued new guidelines for valuing trading assets, that could lead to a “fan chart” for solvency estimates. Some call this “confidence (interval) accounting”.
BIS has a new Working Paper by Borio, Drehmann and Tsatsaronis. They note that stress test have proven useful, but not for their intended use:
Ironically, macro stress tests are best suited to crisis management and resolution; currently, they are not reliable, in our view, for identifying vulnerabilities in seemingly tranquil times – the purpose for which they were originally designed.
They also note that for stress test to work there is a need for a new mindset:
Ultimately, however, improvements in the performance of stress tests depend on a change in mindset. No stress test can succeed unless there is a strong will to stress the system hard and to distrust rosy results. And here lies the problem. The importance of the right mindset has been appreciated ever since the inception of stress tests (eg CRMPG (1999)). But this proved to be no check on the generalised hubris that prevailed before the recent crisis among market participants and policymakers alike. Will it be any different next time?