Basel regulations displaced bankers’ practical credit judgment with statistical risk models

Evidence

Indeed, to be able to use the IRB method (the least capital-intensive), banks have to pass the ”use test” proving that they did not devise their ratings system solely for regulatory purposes in order to save capital, but also use it in their everyday business, particularly in decisions regarding approval of and interest rates on credit. Estimating credit risk has been one of the core tasks in a banker’s profession ever since the profession existed, and so banks have developed routines, methods, and approaches to understand their clients and make their decisions as to whether to grant credit and at what rates. While some banks, especially those dealing in consumer credit, had developed statistical studies on default rates and the determinants of default in order to guide their decisions, such practices by no means extended to all banks or all types of credit and client groups. Transposition of the Basel accords into European, then French, law placed the banks under an obligation to conduct studies, manage their credit portfolio accordingly and charge for credit based on the statistically estimated risk. This new approach to credit strongly disqualifies the local knowledge and experience accumulated by credit managers. Applications and projects are no longer assessed on their own merits, but as bearers of indicators (figures) that predict probable estimated risks under models calibrated on the basis of past history. Also, bankers have less control over their interest rate policy: variations in rates are set by category, based on the statistical risk. — Ève Chiapello, Financialisation of Valuation, 63

Categorization

• XREF: The ‘use test’ and the disqualification of practitioner knowledge resonates with the financialization critique that abstract models colonize local expertise — connects to the reader’s finance/valuation theme and to sociological work on quantification. — connects to: Credit-risk regulation imports market-finance models developed for traded securities. — Ève Chiapello, Financialisation of Valuation, 60; Risk-category classification replaced individual screening as credit control logic — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 360; Consumer credit judgement shifted from personal relationships to automated for-profit scoring — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 359 (+3 more)
• SEED: The ‘use test’ is a rich angle: a regulatory device that forces institutions to pretend their models serve business purposes, when actually the regulation itself is reshaping the business — could feed a piece on how compliance theater becomes reality.

Related

• Credit-risk regulation imports market-finance models developed for traded securities. (similarity 0.85)
• Risk-category classification replaced individual screening as credit control logic (similarity 0.81)

Broader Connections

• Risk-category classification replaced individual screening as credit control logic #corroborates (0.92) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 360
• Consumer credit judgement shifted from personal relationships to automated for-profit scoring #corroborates (0.80) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 359