BOE’s Haldane Sees Risk Regulators May Misjudge Capital Needs

Bank of England official Andrew Haldane said the tools regulators use to assess banks’ capital needs may contain flaws that cause them to underestimate the level of buffers required.

“Even post-crisis, too many of these models remain at risk of being misled by normality, fooled by randomness,” he said in a speech in Edinburgh today. “That was a key fault line during the crisis and, as recent experience attests, remains a key fault line today.”

Haldane, executive director for financial stability at the central bank, said the Value-at-Risk model developed by JPMorgan Chase & Co. (JPM) in the 1990s is an example of an approach to assessing risk that managers want to keep using even as it “continues to surprise on the downside.” The Black-Sholes options-pricing formula can also, “if taken at face value, lead to a material mispricing of risk,” he said.

Commenting on JPMorgan’s announcement last month of a $2 billion loss on a portfolio of corporate credit exposures, Haldane said that while the firm has revised the VaR measure on that portfolio, that reassessment may not be adequate.

“Whether this proves a more accurate measure of tail risk on this still-open position remains to be seen,” he said. In general, “the fatter the tails of the risk distribution, the more misleading VaR-based risk measures will be.”

Financial regulators must avoid overly-specific regulations as “complex intervention rules may simply add to existing uncertainties in the system,” Haldane said.

A “systemic oversight agency, able to monitor and potentially model the moving pieces of the financial system,” is needed to address a risk management gap that arises from the difficulties of assessing risk that’s outside of the normal distribution of risks, he said.

To contact the reporter on this story: Jennifer Ryan in London at

To contact the editor responsible for this story: Craig Stirling at

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