Broader Implementation of Recent Regulatory Standards Could Have Mitigated Subprime Crisis Say BearingPoint Experts
19/10/2007
Fallout in Credit Markets Reveals Structural Limitations of Basel II

McLean, Va., October 4, 2007 – Foreclosure rates are skyrocketing and the effects of the credit meltdown continue to spread across global markets and financial institutions. Technology and management consultancy BearingPoint Inc. (NYSE: BE) believes that this crisis has revealed serious limitations to the Basel II bank regulatory regime, along with a litany of additional structural deficiencies related to lending. According to BearingPoint, these issues have contributed to and possibly exacerbated the current strain on the financial markets. BearingPoint has also identified a series of prescriptive steps for market participants that can improve their risk posture and potentially lessen the impact of future market shocks.

"The fissures that first appeared in the subprime market are linked to a seriously deficient risk management structure in the United States, highlighted by major limitations of the Basel II regulatory framework," said Sandeep Vishnu, managing director, Enterprise Risk Management at BearingPoint.

Vishnu added, "Because Basel II’s advanced requirements were limited to "core banks" in the U.S., large sections of the nation’s financial services market were left unaddressed. In fact, one of the largest originators of subprime mortgages was not considered a core financial institution under U.S. implementation of Basel II and therefore did not need to comply with its risk management structures. "

These structural limitations were further compounded by Basel II’s unbalanced focus on credit origination versus new credit derivative instruments, as well as market participants’ over-reliance on credit ratings, all of which hamstrung the industry’s ability to address diversification and concentration of risk.

BearingPoint recommends that financial institutions take several immediate steps towards heading off problems highlighted by the subprime crisis:

* Refine governance policy to give the risk management function a mandate to question and, if called for, constrain sales strategies that may increase risk exposure.

* Clarify and improve management reporting and risk reporting communications with executives and the board of directors.

* Examine the creditworthiness of all portfolios using rigorous scenario analysis, stress testing and analysis of data gaps. Use scenarios to reveal which portfolios lack the data necessary to assess their risk profile, and then resolve the data deficiency.

* Invest in technology now to 1) aggregate loan details by portfolio risk, 2) capture and analyze risk information at a sufficiently granular level, and 3) present that information to the board of directors, senior management, line of business managers, regulators, investors and other stakeholders.

BearingPoint financial services and risk management experts Christopher Hamilton and Sandeep Vishnu are available for comment on Basel II and other structural issues that have contributed to the current environment. They can also provide additional detail on proactive steps the industry can take to ease the reverberations being felt across the markets.

About BearingPoint, Inc.

BearingPoint, Inc. (NYSE: BE) is one of the world's largest providers of management and technology consulting services to Global 2000 companies and government organizations in 60 countries worldwide. Based in McLean, Va., the firm has more than 17,000 employees focusing on the Public Services, Financial Services and Commercial Services industries. BearingPoint professionals have built a reputation for knowing what it takes to help clients achieve their goals, and working closely with them to get the job done. Our service offerings are designed to help our clients generate revenue, increase cost-effectiveness, manage regulatory compliance, integrate information and transition to "next-generation" technology. For more information, visit the company's Web site at www.BearingPoint.com .