Howard Davies, the chairman of the Financial Services Authority, will argue today that the EU should avoid a simple extrapolation of the proposed Basel capital rules for banks to investment firms. Speaking at a Fund Forum conference in Monaca, Davies says it is important to recognise that, especially in the case of operational risk, one size does not fit all firms in the financial services industry.
In his speech, Davies comments: "One key element of the new Basel proposals is the inclusion of a separate capital charge for operational risk. We are clear that this must be part of the equation in the long run. But it is unfortunately true that the initial Basel calibration generated operational risk charges which, for investment firms and fund managers in particular, seem to be well above what might reasonably be required."
A simple extrapolation of the Basel model to investment firms produces percentage increases for fund managers which, in some cases, are quite outlandish notes Davies.
He says that it may be necessary to consider a further breakdown into business lines which would allow for a more risk-sensitive operational risk charge based on different scaling factors for different categories of business.