Algorithmics comments on Incremental Risk in Basel II – and its implications for future capital management

21 October 2008

Algorithmics, the world's leading provider of risk solutions, submitted a comprehensive response to the Basel Committee on Banking Supervision, supplying an analytical review of the Guidelines for Computing Capital for Incremental Risk in the Trading Book proposed in July 2008. While commending the Committee for its prompt action in response to the credit crisis, as it stood in July, Algorithmics expressed some concerns whether the implementation of the proposed rules would be consistent with the Committee's stated objectives in a number of areas. Substantiating its concerns with several detailed technical documents, Algorithmics suggested further consideration of those rules.

Michael Zerbs, President and COO, Algorithmics, said: "We believe the extension of the incremental charge to cover default, migration, spread and equity risks – including correlations within and across those risks – is an instrumental step in managing the real risks faced by institutions today. The proposed changes are likely to result in a more comprehensive and risk-sensitive capitalization standard for the trading book. Many of our clients already examine such risks for management purposes.”

“The proposed timeline for the changes will be challenging for some institutions. We expect to help clients meet the upcoming regulatory capital requirements, enabling them to focus their attention on managing their core business. As the requirements evolve we believe our expertise can provide support to organizations looking to implement these changes in a timely manner,” continued Ben De Prisco, Senior Vice President of Research and Financial Engineering.

"The change in scope since the previous version of the guidelines has created much concern in the industry. We found that in some cases the inclusion of additional risk factors implies the inclusion of a significant part of the trading book previously excluded from the incremental risk charge. Our other main concern lies in interpreting the results and implications of the constant level of risk approach,” added Diane Reynolds, Senior Director, Economic Capital.

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