A group of banks say a project that could help reduce the gap between different lenders’ estimates of operational risk losses under stress is starting to bear fruit. The estimates play a major role in determining how much capital banks must set aside against their exposures under regulatory stress-testing programmes.

The group is working on a project led by the American Bankers Association to standardise the way in which risk drivers are set for a variety of op risks, including the impact of a

This is the second in Risk.net’s series of crowd-sourced scenario generation exercises. To see the results of the first, please click here. To join the polling for the third, click here.

Jump to: Results | Backtest | Scenarios

Financial markets have been living with Covid-19 for a little over six months, giving participants some time to get to grips with the impact and implications of the disease – but, over that period, their predictions have become more polarised, rather than less.

That is

COMMENTARY: Fear is the key

Market practitioners have known for centuries that there was more to economics than the rational pursuit of advantage. “Sentiment was somewhat weak on the Exchange today”, ran the caption to a 1920s cartoon in Punch, depicting two tail-coated traders sobbing in each other’s arms. And the breakthrough of behavioural economics was finding ways to bring this sentimental element into mathematical – and, in particular, computer – simulations of the economy.

This week, Risk.net talked to one of the pioneers of agent-based modelling, New York University epidemiology professor Joshua Epstein.

Previous interviews with academics have looked at the roles of overconfidence and regret, or the potential for macrocosm and world-in-a-bottle simulations of the global economy; Epstein though is more interested in fear. Rising and falling levels of fear lead to changes in behaviour as an epidemic grows. People avoid contact when afraid...

The shortcomings of credit ratings are well known. Like the fuzzy screen of an early TV set, they give an impression of what’s going on, but lack reliability. Now, new research suggests that combining ratings with public financial information can get you a much clearer picture.

Credit ratings are clearly imperfect. The 2008 crisis notoriously revealed their vulnerability to commercial influence, and recent research highlighted their tendency to be ‘sticky’ just above the point of a downgrade to

The US derivatives regulator has signalled it may delay a controversial rule that would stop clearing banks from ring-fencing margin accounts.

The rule, due to be enforced on September 15, would allow futures commission merchants (FCMs) to claw back margin from across accounts belonging to the same end-investor, even if assets are allocated across different asset managers.

A spokesperson for the Commodity Futures Trading Commission tells Risk.net: “We are aware further no-action relief may be

Bank of America has switched to a new leverage regime 18 months before US banks are required to move, dramatically cutting its total exposure – but finding itself alone among its domestic rivals.

BofA is expected to use the move to the standardised approach to counterparty credit risk (SA-CCR) as a springboard for its equity prime brokerage business, which consumes less capital under the new rules. Options market-makers have also welcomed the switch, believing they will be more attractive clients for BofA’s clearing franchise.

So far, other banks appear unwilling to accept the trade-offs in the switch, which reduces capital consumption for some businesses, while raising it for others

Jump to In focus: fat-finger flubs | Spotlight: cyber fines

August’s largest loss event occurred at Citi, which accidentally wired $900 million to a group of lenders to cosmetics giant Revlon. The two sides were already locked in a dispute over a soured loan to the private equity-backed firm. As of August 21, Citi has not recovered a total of $520.4 million, for which the bank is now suing the lenders involved.

On August 11, Citi had sent notice to Revlon lenders, intending to pay them accrued interest payments. However, due to apparent issues with loan-processing systems, the payment to each lender was on average more than 100 times the interest due. Multiple news outlets suggest the bank inadvertently paid back both the loan principal and the accrued interest. Citi had intended to send one lender a total of $1.5 million, for example, but instead sent $176.2 million.

The bank was able to stop some of the payments, which totalled almost $900 million....

LCH says it will start accepting Singapore-dollar denominated bonds as collateral by the end of the year. The country’s banks have welcomed the move, saying it will hopefully ease margin funding burdens and make membership of the London-based CCP more attractive.

Singapore’s banks have long called for US and European central counterparties to accept a broader range of local currency securities as collateral, with many arguing they are disadvantaged by the extra funding costs associated with

Following months of uncertainty after suffering losses on soured trades, Ronin Capital, once the largest name in proprietary trading in Chicago’s futures markets, seems finally to be shutting up shop.

Several of the firm’s legal entities have withdrawn the regulatory licences they need in order to trade.

Ronin Capital LLC filed to withdraw its registration as a broker with the Financial Industry Regulatory Authority, Finra, on July 31, 2020. It ceased to be registered with the US Securities

Large asset managers are banding together in a bid to make it easier for firms to garner important disclosures from vendors about the models they purchase.

In an effort spearheaded by the Garp Risk Institute, about 60 of the world’s largest investment firms have issued a set of standardised requests for vendors about the governance, data and testing that go into the models that are integral to their risk management. The document is designed to be broad enough to apply to market, credit and

Banks are creatures of habit, especially when it comes to large payments – meaning any departures from the norm can be a sign of operational foul-ups or impending liquidity problems, new research suggests.

Using data from the EU’s Target2 large-scale payment systems, Bundesbank researcher Marc Glowka constructed ‘fingerprints’ for the 210 most active participants, and showed they could be clustered into sets of similarly behaving institutions – making oversight easier. The research will appear

The economic fallout from the Covid-19 pandemic has spurred banks to increase due diligence of vendors that provide critical outsourced services – while at the same time making audits of such firms difficult, and on-site inspections impossible.

Companies are scrutinising everything from the financial well-being of their third-party suppliers to their ability to switch to other providers, should their primary ones fail. This is all the more important in an environment where on-site inspections

Non-parametric models that do not rely on normal distributions are all the rage in finance these days – especially among quants experimenting with big data and machine learning techniques. But research published in the Journal of Risk Model Validation suggests banks might want to stick with old-fashioned parametric models for calculating value-at-risk.

University of Warsaw economists Mateusz Buczy?ski and Marcin Chlebus tested VAR calculations for equity indexes from six countries using a

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.

One example

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?

Unlikely.

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.

In a

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