The Dog and the Frisbee by Edu Pristine

Author of lecture The Dog and the Frisbee

Edu Pristine

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Excerpts from the accompanying material

... use, mental shortcuts, intuition, and common sense. These are evolutionary responses, honed by experience, either passed down the generations or accumulated in the present and have been asserted to have neurological roots. ...

... of future states are unknown, decision-making approaches based on risk-weighted probabilities are not suitable. When dealing with fat-tailed distributions, using an equal-weighted approach might be a better strategy. Complex rules and defensive behavior: Complex rules may cause people to manage to the rules, for fear of falling foul of them. ...

... of uncertainty about the environment determined by the length of the sample over which the model is estimated. The smaller the sample, the greater the model uncertainty and the better ...

... II followed in the footsteps of this amendment. Risk exposures were no longer being captured at a broad assets class level and risk weights were not confined to five buckets. Greater detail and complexity had crept into the regulatory system. ...

... Basel III and the Dodd-Frank Act of 2010 surpass by far the Glass-Steagall Act of 1933 in terms of the number of rules and resulting number of pages needed to put them in order. The Regulatory Response. Number of human resources ...

... The pre-crisis leverage ratio of failing banks was found to be statistically significantly lower than surviving banks at 1% significance level, by on average 1.2 percentage points. Two conclusions: First, simpler measures of accounting capital based on equity ...

... banks, being already subjected to a leverage ratio, might have sought higher-risk assets, which would be better reflected in risk-based capital ratios. Two, risk-based rules might be more robust in an easier to calibrate risk environment. CAMEL (capital, asset quality, management, earnings and liquidity) indicators of bank strength were used to study the failure of FDIC-insured banks. Random bank samples of varying sizes are used to estimate a set ...

... The performance of the complex models improves as the sample size is increased. But even with a sample size of three-quarters of a century, the simple models perform at least as well as the complex one. It can also be tested for the number of assets in a portfolio. ...

... be to impose strict limits on model outputs that would provide a binding regulatory backstop. Simplified approaches to measuring credit and market risk on a broad asset class basis to be used. Leverage v/s Capital. Basel III introduces an agreed leverage ratio – 1/N rule, a good move. ...

... a focus on enhancing transparency and bolster market discipline. Taxing Complexity. A strong case could be made for taxing complexity within the regulatory framework rather than subsidizing it. Cross-system complexity should also be addressed in addition to extrinsic factors. ...