[Warning: Longread]
On the ails of the Basel-IV ORM proposals:
1. Unwarranted, certainly unscientific overreliance on ‘models’;
2. Modeling for prospective use in stead of hindsight understanding;
3. Too much top-down, not enough bottom-up;
4. No humans in the picture, hence the wrong and unactionable indicators.
Introduction
About all of the banking industry, and other financials in their wake, have had to deal with loads of regulatory requirements. Justified, some say, for ‘they’ cause(d) so much misery beyond mere most temporary loss of bonuses that the ‘un’ should be (have been long before) detached from bridled. So, Basel II and -III regulations swooped in requiring much more explicit and detailed handling of financial business than ever before. The move from laissez-faire to regulation, to regulation with sanction schemes, to sanctions (possibly interpreted as ‘token’…), was extended with provability and then complete proof-demonstration as minimum requirement.
This all, however, has created a large, and in general even I would say quite overpaid [disclaimer: am profiting too] industry of consultants, quants, ‘risk managers’, reviewers, assessors, auditors, and scores of Toms, Dicks[1] and Harries of the GRC kind. That are all very likeable nice lads and lassies, but maybe not all quite worth their salt, certainly not their bonuses, or even be sure to be worth much lending one’s ear to.
Keep reading!