Netting (for balance sheet)

All the above complications concerning internal consistency are most evident to the
accounting function which puts together all the assets and liabilities reported by the
separate trading desks to produce the group, or legal entity, balance sheets on which
regulatory capital is based. This is difficult when, as is common, information for
different trading desks is stored on separate systems. The resultant information may
lack accuracy especially if the trading function cares little for the result, and so is
not helpful.
The greatest lack of accuracy in practice concerns determining which assets and
liabilities can be netted. As capital charges are based on netted assets, and trading
organizations are usually short of capital, it is the interest of the organization to net
as much as possible, but this puts great requirements on systems.
While traders rarely care about the accounting function in its preparation of the
balance sheets, that changes when trading desks are charged for their use of capital
since the capital charge will generally be based on numbers calculated by the
accounting function. Thus introducing charging for capital may result in the trading
function being more helpful to the accountants so reducing the accounting risk.
Such behavioural aspects of risk management are important, and should not be
neglected in the pursuit of mathematical measures of risk.