Leaning into the next economy

Provided by FICO

There is a new emphasis on ingraining counter-cyclicality into the financial system. The Basel Committee on Banking Supervision is phasing in a counter-cyclical capital buffer requirement to try and prevent the buildup of excess credit growth. This is forcing bank executives and capital committees to reconsider the way they plan and manage capital and in particular, to look at what tools they need to address pro-cyclicality in current capital and risk management practices.

Approaching the issue of pro-cyclicality at the national and international level, through both regulatory initiatives and industry initiatives, is the only way to ensure the consistency and convergence of approaches needed to build a sounder and more effective financial system.

This white paper explains why this is the case and discusses:

• Why Basel Committee recommendations on counter-cyclical capital management are only the first step in building a financial system that can truly “lean against” prevailing economic conditions.
• How addressing risk-weighted assets will lead to more efficient capital management at a bank level.
• What new analytic solutions that marry economic forecasts with credit risk metrics can do to improve counter-cyclical risk and capital management.

 

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