Risk Insight: As Basel-Mandated Model Updates Confuse Bystanders, Banks Need Better Risk Disclosure
Commentary by Adam Litke
When Morgan Stanley released its earnings this October it immediately came under fire for shortening the historical period used in its VaR model from four years to one year and thus lowering its capital charges. Even though the firm explained that this change had been approved by its regulators some commentators were of the opinion that there was some chicanery afoot. During their earnings call1 Morgan Stanley executives stated quite clearly that this new model was aligned with Basel 2.5, the new capital rules for the trading book which will be fully in effect on Jan. 1, 2013.