An Academic Response to Basel II

Abstract

this document we present the following arguments: . The proposed regulations fail to consider the fact that risk is endogenous. Value-at-Risk can destabilise an economy and induce crashes when they would not otherwise occur. . Statistical models used for forecasting risk have been proven to give inconsistent and biased forecasts, notably under-estimating the joint downside risk of different assets. The Basel Committee has chosen poor quality measures of risk when better risk measures are available. . Heavy reliance on credit rating agencies for the standard approach to credit risk is misguided as they have been shown to provide conflicting and inconsistent forecasts of individual clients' creditworthiness. They are unregulated and the quality of their risk estimates is largely unobservable. . Operational risk modelling is not possible given current databases and technology even if a meaningful definition of this risk w