Having become accustomed over the years to the calm, soothing, “don’t panic” talk of financial regulators, it was a shock to read Andrew Bailey, the senior UK banking supervisor, bluntly describe banks’ risk models for commercial real estate as “bogus”.
Mr Bailey clearly has very little, if any, time for banks’ internal risk models, which calculate how much they might lose in stressed market conditions, and therefore how much they need to put aside in capital.
As Brooke Masters reports:
After two decades of working with failed and failing institutions including Barings, HBOS and Royal Bank of Scotland, he was openly sceptical of bankers’ ability to police themselves.
Their commercial real estate risk models are “bogus”, he said, and their internal stress tests “are not stress at all, they’re mild, it’s a failure of imagination”. As a result, banks “never should have been allowed” to use their own models to determine capital requirements as currently permitted under the Basel rules.