The Basel Accord Measurement Approaches: Sufficiency, Consistency, and Scientific Modeling in Financial Risk Assessments

Abstract
The Basel Committee on Banking Supervision (BCBS) was established as an international authority in 1974 by the central bank governors of the eleven countries providing lending resources to the International Monetary Fund (IMF). After several expansions in the intervening years, the BCBS now has 45 members. It does not issue binding regulations, and is not based in an international treaty. It is rather an informal body that recommends policy solutions, common approaches, and standards, such as those included in the Basel Accords, useful to solving problems of financial capacity and information. The overall intention is to minimize the possibility of large scale financial catastrophes. The emerging problem, which in many respects still has not been identified or articulated by BCBS or the banking industry, concerns the limits of traditional methods of financial accounting and statistical modeling as mechanisms for measuring and managing the wide range of substantive risks encountered in commercial enterprises. Alternative approaches to measurement and management with significant practical value take shape in closer examination of the longstanding and widely recognized risk assessment problems of data sufficiency and consistency. There are urgent needs to capitalize on, literally, the singular value for financial risk assessment obtained over a long history from a particular class of measurement models. These models formalize data sufficiency and consistency in ways that are as rigorous and reproducible as they are practical, convenient, and meaningful. These models, moreover, surpass the limitations of traditional statistical modeling by augmenting the focus on data with substantive experimental evaluations of explanatory theories, and with mass customizable instruments calibrated to defined units with known uncertainties. This paper contrasts commonly employed accounting and statistical models with scientific models combining (a) experimental data and evidence with (b) networks of instruments calibrated to common units, and with (c) validated predictive theories, in complex, adaptive, multilevel ecosystems. Quality assurance documentation of constant metrological traceability will be an essential component of distributed systems for measuring and managing risk. Applications of scientific models of this kind stand to address the risk assessment concerns taken up in the Basel Accord more effectively than current statistical methods, and to also offer the potential for meeting similarly urgent demands for more sustainable economic development policies and practices on broad scales.

William P. Fisher, Jr. received his doctorate from the University of Chicago, where he was mentored by Benjamin D. Wright and supported by a Spencer Foundation Dissertation Research Fellowship. Dr. Fisher is recognized for contributions to measurement theory and practice that span the full range from the philosophical to the applied in fields as diverse as special education, mindfulness practice, clinical chemistry, and survey research. His articles have appeared in journals spanning a similarly wide range of fields, from education and psychology to nursing and occupational therapy to physics and metrology. Dr. Fisher’s entry on metrology and measurement in the 2011 World Standards Day paper competition won third prize, which is notable given the focus on engineering and natural science topics usually emphasized by the competition sponsors, SES, the Society for Standards Professionals, and the US National Institute for Standards and Technology. In efforts toward this same end of fostering more informed dialogue between the natural and social sciences, Fisher began contributing in 2008 to an ongoing conference hosted by the International Measurement Confederation (IMEKO) on the human and social value of measurement. Work in this area ultimately led to an IMEKO Joint Symposium co-hosted by Fisher and Mark Wilson at UC Berkeley in August 2016.

Date: 
Tuesday, October 1, 2019 - 2:00pm
Building: 
Berkeley Way West
Room: 
1215
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