Excellent article in the Economist, purporting to be from the risk manager of a large global bank. Click here to get there.
Following on from my question posed in "Grey Men in Grey Suits" - namely, what impact the new accounting standards have had on the whole sub-prime/credit crunch fiasco, I was particularly interested to read this comment in the article:
Another lesson is to account properly for liquidity risk in two ways. One is to increase internal and external capital charges for trading-book positions. These are too low relative to banking-book positions and need to be recalibrated. The other is to bring back liquidity reserves. This has received little attention in the industry so far. Over time fair-value accounting practices have disallowed liquidity reserves, as they were deemed to allow for smoothing of earnings. However, in an environment in which an ever-increasing part of the balance-sheet is taken up by trading assets, it would be more sensible to allow liquidity reserves whose size is set in scale to the complexity of the underlying asset. That would be better than questioning the whole principle of mark-to-market accounting, as some banks are doing.
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