Wish I understood...

[Dover]

Ever come across material that is over your head, but you sense it might be important?

That's the case with this document:

http://74.125.47.132/search?q=cache:UOKeFOgje7gJ:www.federalreserve.gov/SECRS/2006/July/20060726/R-1261/R-1261_2_1.pdf+npr+pd&cd=18&hl=en&ct=clnk&gl=us

[Turbineguy]

1. You mean like

exceeding the 5 percent default limit and the risk securitizations?

[Dover]

2. uh huh...

sounds like fuzzy math.

[Turbineguy]

3. My mortgage bank did some

sub-prime loans. But they were careful to assess the risks. They did well.

[marketcrazy1]

4. this document concerns

basel 2 accounting rule changes proposed in 2006 ( NPR = notice of proposed rule making ) this is an interesting read, thanks for posting it. Basel II is an effort by international banking supervisors to update the original international bank capital accord (Basel I), ... bottom line here is basel 2 failed!!! allowing banks to self regulate was stupid! ( as we are now seeing.... )

[Dover]

7. Thanks for that info. Anything more you can glean from this report?

Sounds like you might have a better handle on this than most of us.

[marketcrazy1]

8. this document is interesting

in that it reveals a little of the banking industries modeling methods, the document is mostly a series of questions regarding rules and rule changes for determining risk exposure assessments and adjustments to reserve requirements using multiple accounting methods. the questions seem mostly geared to clarifying the regulators rules for loss exposure accounting along varying product lines and security types to remain in compliance with Basel II guidelines. the questions reference rules not defined in the document and does not include complete regulator responses RE the questions being asked. to have a complete understanding of what is being discussed you would need to see the complete Basel ll rule set being discussed along with the specific detailed answers by the Basel ll committee to the questions being asked...... other than providing a unique glimpse into banks modeling methods this document is of little significants ( IMO ) but thanks for posting it!!! ---------------- I should add that it was interesting to read how banks were modeling and relying on risk models to determine capitol adequacy in the event of extreme credit events. we have all seen over the past year or so how well ( awfully ) these models worked!!! regulators allowed banks wide latitude in modeling their risk exposure and setting / calculating reserves against these models... the models failed and banks found themselves under capitalized by a significant margin.. regulators did not regulate! they allowed the banks to model their risk exposure but the models were using incomplete data sets, because no historical data existed to model the complex debt instruments banks were engineering. the missing data points were simply modeled and inserted ( made up numbers ) to generate a complete data set.. amazing lack of judgment all around!!!!!

[Dover]

9. Thanks for that summary! Much appreciated...n/t

[econoclast]

11. What would you say if ...

You correctly point out the following:

"the models were using incomplete data sets, because no historical data existed to model the complex debt instruments banks were engineering. the missing data points were simply modeled and inserted ( made up numbers ) to generate a complete data set"

Suppose it was the case that the mathematics that enabled banks brokers insurance companies to "generate complete data sets" was developed by a Chinese national (it was) who has since returned to China (he did) and that he us unavailable for interviews or comment on the subject (he is unavailable for comment)

Ordinarily, I am the least conspiratorial-minded person on the planet. But this makes me wonder. Am I the only one?

[marketcrazy1]

12. never heard that story......... interesting!

sounds like tin foil... but i like it!!!! things that make you go Hmmm!!! indeed! .... welcome to DU!!!

[econoclast]

13. Thanks for the welcome!

I look terrible in hats of all kind - but especially tin foil ones. Regardless. Check out the Journal of Fixed Income. ... 2000 or so. Article called something like Default correlation: AGaussian Copula approach. Something like that. David X. Li

It is the seminal article that made pricing (or mispricing) all the exotics possible.

[marketcrazy1]

14. dont mention it......... I will. N/T

[notesdev]

10. Basel wasn't the only failure

remember Sarbanes-Oxley (SOX)? The thing that was supposed to put a stop to exactly the type of accounting fraud that turned our banking system into zombies? IIRC the estimates were of $1 trillion in compliance costs... and the end result is it did absolutely nothing.

[dixiegrrrrl]

5. Interesting.

Where did you find this?

You DO know Basel, right?

Wiki says:

***Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.***

Notice that bank regulators AND the Big Banks were meeting to agree to rules about reserve standards.
NOw, in 2009, looking back, seems those reserves were not high enough.
My take, anyhow, on what you found and posted.

[Dover]

6. Hi DG. Yes, I think I was among the first to post articles about Basel here.

So I know their importance regarding their oversight of global banking.

Unfortunately I'm not the brightest bulb when it comes to understanding the workings of
global economics. However I'm able to glean some information which is why this document
seemed important to me.

I found it quite by mistake, doing a search on an entirely different subject.