The 20th annual RISK USA Conference organized by Risk Magazine in New York on October 20-23, 2014 showcased the latest developments in risk management, best practices and critical issues impacting the financial industry.
The Conference keynote speakers included among others Ben Golub, CRO, Blackrock; Carlo di Florio, CRO FINRA; Stuart Lewis, Group CRO Deutsche Bank. The focus was on critical issues in four areas: Enterprise Risk Management, Derivatives Trading, Portfolio and Investment Risk and Technology and E-trading.
The main takeouts from the conference are:
New regulation implemented since the financial crisis of 2008 had the most profound impact on rates and derivatives making them capital intensive with low returns. Banks are now well capitalized (some have 20% in Tier III, banking system in Europe is robust), leverage is lower, cost of capital is higher as Tier 1 (includes total capital and equity) is not tax-deductible, banks understand better risk aggregation under CCAR and how risks and losses are stressed, loans are properly provisioned, new risk weights impact capital, leverage and liquidity and liquidity leverage ratio is in place. Shortcoming is, there is a lot of data to be processed which requires more efficient technology infrastructure to secure data quality and integrity.
Risk environment is characterized by low liquidity and volatility, and uncertainty to non-financial risks that are infrequent but have catastrophic impact: cyber attacks, pandemic fear, geopolitical crisis (Ukraine, Ebola), low pace of structural changes in EU and China (expected “hard lending”), shrinking of US balance Sheet due to tapering off of quantitative easing. Derivatives markets in particular need spike in volatility and innovation to bolster low trading volumes and returns, compliments of low vol. Credit markets are on their own search for yields and turning to developing countries for depth and to revive credit. This calls for embedding macroeconomic risk into models and systemic risk and macro hedging.
What to expect in the future: Inevitable rate hike, perseverance of the basis risk, skewness of risk of returns,
Banks that adopted Basel III in 2013 will need to be CCAR compliant by 2016 and fully compliant by 2019
New Basel III Reporting will include CCAR capital adequacy requirement reporting, possible shift from VaR to Expected Shortfall as a preferred risk measure, adoption of the funding ratio. More data is needed on non-financial events like operational breakdowns.
How will the Role of Risk Management function change: in the long-term it will have tight structure that will improve decision making and implement New Asset pricing models that will help robustness checks. These new models will include regression of macroeconomic events, will stress all assets calculating impact on global equity prices and broader use of time series, will optimize balance sheets on forward looking basis, produce monthly risk capital reports and matrices on capital leverage and liquidity.
And the inevitable: How to deal with the Volker Rule.
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