When global standard-setters were crafting their new accounting regime for expected credit losses, little did they know that an economic shock would turn the rules on their head so soon.
Under IFRS 9, banks must set aside provisions to cover losses over the life of a loan when the likelihood of default increases. The regime has a simple philosophy: when credit risk rises, loan reserves rise.
But the coronavirus crisis has prompted a rethink. Regulators in Europe and Asia are now pressuring
This is the fourth in a series of articles connected to our buy-side risk survey. Click here to read the rest of the series.
Friday the 13th of March was a real horror show for relative value hedge funds. After stocks crashed the previous day, investors began dumping bonds in a desperate dash for cash. Dealers struggled to absorb the selling. Spreads widened and the usual correlations between bonds and futures broke down, setting off a massive unwinding of basis trades. That morning, yields on
COMMENTARY: VAR from ideal
VAR is going nowhere – but, before the gloom sets in, there’s evidence that understanding of its shortcomings and limitations is now more widespread than ever. Risk.net surveyed buy-side risk managers around the world on their reactions to the pandemic and the market turbulence it caused – and asked them how they planned to change the way they did business.
The results make interesting reading. VAR’s value as a single, easily understandable measure of risk outweighs any problems it has, in the eyes of a majority of risk managers. The biggest changes in sentiment appear to be a growing appreciation of liquidity risk – now ahead of operational risk in the collective ranking of threats – a drive to overhaul the contents of risk reports to make them more useful, and a new determination to step-up scenario analysis.
All three of these conclusions need to be treated with a degree of caution. The full extent of operational risk...
To mitigate financial stability risks, policy-makers and regulators should be able to measure and analyse contagion – that is, the spread of losses and defaults through the financial system. I have been working on this problem with Paul Glasserman at Columbia Business School and Peyton Young at the London School of Economics. We recently developed a network model to study the impact of margin requirements and stay rules in bankruptcy and resolution regimes in over-the-counter derivatives on
This is the third in a series of articles connected to our buy-side risk survey. Click here to read the rest of the series.
When Risk.net asked buy-siders which risk measure helped them most through the Covid-19 selloff, few chose value-at-risk.
Three-quarters of respondents to Risk.net’s buy-side risk management survey use VAR to measure portfolio risk, behind only portfolio volatility (80%) and historical stress tests (77%). But asked how useful VAR had been during the selloff, one-third
This is the second in a series of articles connected to our buy-side risk survey. Click here to read the rest of the series.
Sudi Mariappa, head of portfolio risk management at Pimco, has a degree in chemical engineering – training that he says has taught him to iterate until he finds a solution, rather than look for absolutes. Likewise, the lessons he has drawn from the Covid-19 crisis will lead to a “sharpening” of Pimco’s existing risk management tools, rather than an overhaul.
Credit Suisse has strengthened its securities joint venture on the Chinese mainland, Credit Suisse Founder Securities, with a few key appointments. Tim Tu becomes chief executive officer (CEO) of the CSFS, whilst current CEO Minsheng Wang has been appointed vice-chairman of the joint venture. In addition, Daniel Qiu will take on the newly created role of head of investment banking and capital markets for CSFS. Tu joined Credit Suisse in 2016 from Standard Chartered Bank as head of structuring for Greater China in the bank’s Asia Pacific Financing Group. Wang has more than 25 years’ experience in China’s financial industry across investment banking and brokerage businesses. He joined CSFS in 2009, and was appointed CEO of the joint venture in 2014. Qiu has been with Credit Suisse since 2010, and has more than 20 years of investment banking experience.
The Swiss bank has also appointed Emmanuel Triomphe as head of Asia Pacific Trading Solutions Sales and...
Click here to download the full survey results.
In September 2018, JP Morgan analysts made an eerily accurate prediction: that the next financial crisis would strike in 2020. What they didn’t see coming was the cause of the crash.
That cause was, of course, Covid-19. As economies around the world went into lockdown, markets quaked. The S&P 500 suffered a series of sharp knocks, tumbling 12% on March 16 in one of the steepest daily drops on record. Bid-ask spreads jumped for most asset classes
Any asset manager worth their salt offers ethical products focusing on environmental, social and governance (ESG) criteria. But does the manager screen these investments against threats to endangered species of wildlife? Or do they monitor how much untreated waste water is discharged by companies in their ethical range of funds?
However, a new law will force all European investment firms to do just that from March next year. The Sustainable Finance Disclosure Regulation (SFDR)
Being a good corporate citizen can be a good sign of a company’s creditworthiness – but it depends which country it’s in, according to a new study.
Gregor Dorfleitner and Johannes Grebler, at Germany’s Regensburg University, and Sebastian Utz, at St Gallen in Switzerland, are the latest researchers to look at the link between financial strength and factors such as pollution reduction, social concern and others, under the heading of corporate social and environmental (CSE) performance.
There is no one-size-fits-all risk management framework. As market volatility shows no signs of easing as we enter this new decade, applying the right models to capture the risk in your portfolios is crucial. This guide details three multi-asset class risk models that global firms rely on and the benefits of each:
The coronavirus pandemic is expected to bring a record number of corporate bankruptcies in the US, but lenders should have spotted signs of elevated credit risk before the crisis struck, new research suggests.
Corporate and government debt approached “dangerous levels” in the first two months of 2020, according to a study by academic Edward Altman, professor at New York’s Stern School of Business. This marked the end of a 10-year credit cycle during which non-financial corporate debt rose to
Josef Ackermann, Anshu Jain, Juergen Fitschen, John Cryan, Christian Sewing – there have been five chief executives of Deutsche Bank during the bleak, bruising years since 2012, but only one chief risk officer (CRO). How has Stuart Lewis done it?
Some CROs would try to avoid answering that. Lewis – a straightforward, softly spoken Scot – takes it on.
“We do a good job of understanding financial risk. You saw that in 2008 and afterwards,” he says. “I think our biggest failing was on the non
COMMENTARY: Too quiet
The human disaster of 2020 has been mirrored in the macroeconomic data – the lists, lengthening each day, of the sick and dead of the pandemic are echoed by reports of rising unemployment, economic contraction, business failure and spiking debt.
In that context, one report on Risk.net this week might have come as a surprise – total operational risk losses for the first half of 2020 were only just over half the figure for the same period in 2019, just $7.39 billion against $14.28 billion.
If by this point in 2020 you’re instinctively suspicious of anything that looks like good news, well, you’re thinking along the right lines. This does not in fact represent an unexpected and welcome improvement in the ability of financial institutions to stop tripping over their own feet. It doesn’t even reflect that business has slowed with the economy – fewer transactions, fewer loans, less activity generally – and so there are fewer operational risk...
The London Metal Exchange is understood to have been left frustrated by its failing grade in the European Securities and Markets Authority’s clearing house stress test this week, after the watchdog subjected its default resources to price shocks that were up to three times more severe than the worst one-day falls on record in key base metal markets.
On July 13, Esma released the results of a stress test for Europe’s largest central counterparties, which simulated two scenarios: a large price
In an ironic twist on the notion of futurism, it is conceivable that, for asset managers, the post-Covid landscape will look less like Fritz Lang’s Metropolis and more like Little House on the Prairie. Certainly, managers are preparing for an operating environment that will look dramatically different from the densely city-centric concentrations of the pre-Covid world – with a greater dispersion of capabilities and a higher proportion of staff working from home.
As the pandemic continues to
Jump to In focus: H1 op risk losses | Spotlight: SEC fines Telegram
June’s largest loss was Nordic lender SEB’s $107 million fine for anti-money laundering failures in its Baltic operations. This is the second fine for AML failure handed out this year by the Swedish regulator (FI), which in March fined Swedbank $397 million for similar failures in its Baltic subsidiaries.
FI’s investigation covered the period between 2015 and the first quarter of 2019, in which period it found the bank had
When ABN Amro Clearing sustained a $200 million net loss from New York-based hedge fund Parplus Partners, it contacted its hundreds of clients to explain what had happened, and reassure them all was well.
But as the months rolled by, firms’ curiosity has shifted from what happened in March to what will happen in August.
That’s when the lender will announce the results of a major review of its corporate and investment banking division, which suffered a loss of €575 million ($649.8 million)
COMMENTARY: Is Covid a conduct risk?
The Fed is under pressure to predict the future – not an easy task at any time. This week, Risk.net reports on the growing clamour from US banks for the central bank to provide the results of its Covid stress tests and a new set of updated scenarios – and quickly, before they become obsolete as the pandemic burns through the US.
It’s still impossible to predict the full extent of the damage – human and financial – that the pandemic will cause in the US. Its impact in other countries has been highly varied, and in a way that few could have predicted in advance.
No-one should have been caught entirely off guard by the outbreak, in late 2019, of a novel and highly infectious respiratory disease. A pandemic of this kind has been top of the UK government’s national strategic risk register for the past 10 years or more. True, it anticipated a novel influenza virus rather than a coronavirus as being most likely – as indeed did...
COMMENTARY: Failing better
The Covid-19 pandemic has shown how bad a worldwide operational risk crisis can get. Underestimating the danger of such a crisis is a black mark for op risk managers. The topic didn’t even make it into this year’s Top 10 Op Risks, with almost no respondents to our survey mentioning it even though the outbreak had already broken out of China, and despite multiple near misses or less serious incidents (Sars, Mers, H5N1, Ebola) in previous years.
Why not? As Risk.net reports this week, one problem was a refusal to consider that a pandemic of this scale could ever happen. The organisations that modelled pandemics considered “regional, not global” outbreaks – damaging, but limited in scale and extent, along the lines of the 2003 Sars epidemic in East Asia. It’s a known problem of scenario planning. A desire for psychological comfort means that, when asked to consider worst-case scenarios, people tend instead to describe the worst scenario...
The Covid-19 era of forcible remote working is creating new threats and vulnerabilities in banks’ IT infrastructures – and new bad actors to exploit them, information security experts fear.
The coronavirus pandemic has forced most major US and European financial firms to embrace remote working for the vast majority of their staff. That has made it far more difficult for surveillance teams within banks to monitor data for suspicious or unusual activity, and root out behaviour that poses a
Lions and tigers and bears, oh my. A terrible trifecta of operational, legal and conduct risks could be lying in wait for unsuspecting banks on the Libor transition road. Financial institutions should prepare themselves for these half-hidden hazards, say op risk experts – or face brutal consequences.
Among the challenges of educating clients of varying size and sophistication, experts anticipate the potential for claims of mis-selling, of negligent advice – or of inadvertently providing
COMMENTARY: How close was it?
Operational problems spiked in late March as the coronavirus pandemic accelerated. The combination of rapid evacuation of offices and record-high market volatility put institutions around the world under pressure. Risk.net reported on this before and this week looked at how one bank coped, and at how close those operational problems came to causing a systemic crisis.
UBS seems to have done well – the Swiss bank made the switch to a virtual desktop system some four years ago. Most banks use virtual private networks, in which employees working remotely have the software they need on their laptops, and connect with the bank through an encrypted “tunnel” – meaning they can work as though in the office. Virtual desktops mean the software is centrally held, in a server or on the cloud – the employee’s laptop is simply a “thin client” that accesses the software as required. It’s more complex to implement, UBS says, but makes updates...
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