Dr Gavin Kretzschmar and Professor Alexander McNeil, both from Scottish universities, have criticisms of the FSA chairman’s report last week
Lord Turner’s review on the future of financial regulation is flawed because it fails to outline an integrated approach to risk management, two leading academics claim.
The review, published by the Financial Services Authority last week, has been pitched as a way to set the agenda ahead of next month’s G20 summit.
But Dr Gavin Kretzschmar, the director of finance and risk at the University of Edinburgh business school, said: “There was little on how risks and the understanding of risks need to be pulled together in an integrated, institutional risk-management framework.
“The lack of such a framework was arguably one of the main causes of the credit crisis.”
He added that, by using simplistic “basic asset correlations” to calculate economic capital, British banks are failing to take account of the link between asset classes and risk factors, and therefore capital, that occurs at times of stress.
He suggested the Turner review, commissioned by the Treasury in November, fails to address this: “Guidance as to risk integration is still lacking. It is a surprising oversight.”
Alexander McNeil, a professor of quantitative risk management at Heriot-Watt University, in Edinburgh, said: “What an institution ought to have is a model that explains the sources of dependence and tells an economic narrative about what could happen.”
This article published in The Sunday Times on 22 March 2009. A longer version is also available on this website.