the january recommendations required a direct capital adequacy for each derivative/ cdo etc. (similar to what mr yv reddy did to deflate the real estate bubble in india). however revised guidelines issued last week has removed this more onerous requirement with the following:
a) banks will test their portfolio for predetermined stresses.
b) valuation of their portfolio will be based on their own methods. (ties in beautifully with fair value of IFRS - refer march 5th blog entry)
c) only when the banks internal assessment of one year confidence levels for the "valued" portfolio is less than 99.9% will they need to provide the CAR else no need to allocate risk capital.
this directly reopens the door for a gaussian copula and another Li to emerge and lay waste this diluted apology of an offering from the basel committee on banking supervision.
like i said earlier - the more the things change - the more they remain the same...
the next default will be by the central clearing house as all its members will be bankrupt and the various governments will now save these clearing houses - after all the banks have learnt their lesson - they are not the ones standing in line for tarp this time around.. jai ho!!
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