Basel II for Physicists: A Discussion Paper

Abstract

On June 26th, 2004, Central bank governors and the heads of bank supervisory authorities in the Group of Ten (G10) countries issued a press release and endorsed the publication of "International Convergence of Capital Measurement and Capital Standards: a Revised Framework", the new capital adequacy framework commonly known as Basel II. According to Jean Claude Trichet, Chairman of the G10 group of central bank governors and heads of bank supervisory authorities and President of the European Central Bank: ``Basel II embraces a comprehensive approach to risk management and bank supervision. It will enhance banks' safety and soundness, strengthen the stability of the financial system as a whole, and improve the financial sector's ability to serve as a source for sustainable growth for the broader economy.'' The negotial process is likely to lead to the adoption of the new rules within 2007. In 1996, after the "Amendment to the capital accord to incorporate market risks", a new wave of physicists entered risk management offices of large banks, that had to develop internal models of market risk. Which will be the challenges and opportunities for physicists in the financial sector in the years to come? This paper is a first modest contribution for starting a debate within the Econophysics community.