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2024-03-29T14:39:59Z
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A Loophole Allows Banks – But Not Other Companies – to Create Money Out of Thin Air
https://globalriskcommunity.com/profiles/blogs/a-loophole-allows-banks-but-not-other-companies-to-create-money
2016-01-18T23:27:24.000Z
2016-01-18T23:27:24.000Z
Enrique Raul Suarez
https://globalriskcommunity.com/members/EnriqueRaulSuarez
<div><p></p><p><a href="{{#staticFileLink}}8028239483,original{{/staticFileLink}}"><img width="297" class="align-center" src="{{#staticFileLink}}8028239483,original{{/staticFileLink}}" alt="8028239483?profile=original" /></a></p><p></p><p class="center" style="text-align:center;"><span class="font-size-3"><strong>A Loophole Allows Banks – But Not Other Companies – to Create Money Out of Thin Air</strong></span></p><p class="center" style="text-align:center;"></p><p class="center" style="text-align:center;"><span class="font-size-3">One of the Main Causes of Our Economic Problems</span></p><p class="center" style="text-align:center;"><span class="font-size-3"> </span></p><p class="center" style="text-align:center;"><span class="font-size-3">Source:</span></p><p class="center" style="text-align:center;"></p><p class="center" style="text-align:center;"><span class="font-size-3"><strong>Washington's Blog</strong></span></p><p class="center" style="text-align:center;"></p><p class="center" style="text-align:center;"><span class="font-size-3">J</span><span class="font-size-3">anuary 15, 2016</span></p><p class="center" style="text-align:center;"></p><p>The central banks of the United States, England, and German – as well as 2 Nobel-prize winning economists – have all shown that banks create money out of thin air … even if they have no deposits on hand.</p><p>The failure of most governments and most mainstream economists to understand this fact – they instead believe the myth that people make deposits at their bank, and these deposits are then lent out to new borrowers – is the main cause of our rampant inequality and economic problems.</p><p>But how do banks actually make loans before they have sufficient deposits on hand?</p><p><em>Economics professor Richard Werner – the creator of quantitative easing</em> – noted in September that the field of economics has been lost in the woods for an entire century because it has failed to understand how banks actually create money.</p><p><strong>Professor wrote an academic paper in 2014 concluding:</strong></p><p>What banks do is to simply reclassify their accounts payable items arising from the act of lending as ‘customer deposits’, and the general public, when receiving payment in the form of a transfer of bank deposits, believes that a form of money had been paid into the bank.</p><p>***</p><p>The ‘lending’ bank records a new ‘customer deposit’ and informs the ‘borrower’ that funds have been ‘deposited’ in the borrower’s account. Since neither the borrower nor the bank actually made a deposit at the bank—nor, in connection with this transaction, anyone else for that matter, it remains necessary to analyze the legal aspects of bank operations. In particular, the legality of the act of reclassifying bank liabilities (accounts payable) as fictitious customer deposits requires further, separate analysis. This is all the more so, since no law, statute or bank regulation actually grants banks the right (usually considered a sovereign prerogative) to create and allocate the money supply. Further, the regulation that allows only banks to conduct such creative accounting (namely the exemption from the Client Money Rules) is potentially being abused through the act of‘ renaming’ the bank’s own accounts payable liabilities as ‘customer deposits’ when no deposits had been made, since this is also not explicitly referred to in the banks’ exemption from the Client Money Rules, or in any other statutes, laws or regulations, for that matter.</p><p>Professor Werner explained:</p><p>Although the implementation of banking services relies heavily on accounting, hardly any scholarly literature exists that explains in detail the accounting mechanics of bank credit creation and precisely how bank accounting differs from corporate accounting of non-bank firms.</p><p>***</p><p>It can be deduced that this ability of banks is likely derived from the operational, that is, accounting conventions and regulations of banking. These either differ from those of non-banks, so that only banks are able to create money, or else non-banks have missed out on the significant opportunities money creation may afford.</p><p>In order to identify the difference in accounting treatment of the lending operation by banks, we adopt a comparative accounting analysis perspective.</p><p>***</p><p><strong>When the non-financial corporation</strong>, such as a manufacturer, <strong>grants a loan</strong> to another firm, the loan contract is shown as an increase in assets: the firm now has an additional claim on debtors — this is the borrower’s promise to repay the loan. The lender purchases the loan contract, treated as a promissory note. Meanwhile, when the firm disburses the loan (and hence discharges its obligation to make the money available to the borrower), it is drawing down its cash reserves or monetary deposits with its banks. As a result, <strong>one gross asset increase is matched by an equally-sized gross asset decrease, leaving net total assets unchanged.</strong></p><p>In the second case, of a non-bank financial institution, such as a stock broker engaging in margin lending, the loan contract is the claim on the borrower that is added as an asset to the balance sheet, while the disbursement of the loan – for instance by transferring it to the client or the stock exchange to settle the margin trade conducted by its client – reduces the firm’s monetary balances (likely held with a bank). As a result, total assets and total liabilities remain unchanged.</p><p>While the balance sheet total is not affected by the granting and disbursement of the loan in the case of firms other than banks, <strong>the picture looks very different in the case of a bank</strong>. While the loan contract shows up as an increase in assets with all types of corporations, <strong>in the case of a bank the disbursement of the loan … appears as a positive entry on the liability side of the balance sheet, as opposed to being a negative entry on the asset side, as in the case of non-banks. As a result, it does not counter-balance the increased gross assets</strong>. Instead, both assets and liabilities expand. The bank’s balance sheet lengthens on both sides by the amount of the loan (see the empirical evidence in Werner, 2014a and Werner, 2014c). Thus it is clear that banks conduct their accounting operations differently from others, even differently from their near-relatives, the non-bank financial institutions.</p><p>***</p><p>Surprisingly, we find that unlike the other firms whose balance sheets shrank back in Step 2, the bank’s accounts seem in standstill, unchanged from Step 1. The total balance sheet remains lengthened. <strong>No balance is drawn down to make a payment to the borrower.</strong></p><p>So how is it that the borrower feels that the bank’s obligation to make funds available are being met? (If indeed they are being met). This is done through the one, small but <strong>crucial accounting change that does take place on the liability side of the bank balance sheet in Step 2: the bank reduces its ‘account payable’ item by the loan amount, acting as if the money had been disbursed to the customer, and at the same time it presents the customer with a statement that identifies this same obligation of the bank to the borrower, but now simply re-classified as a ‘customer deposit’ of the borrower with the bank.</strong></p><p>The bank, having ‘disbursed’ the loan, remains in a position where it still owes the money. <strong>In other words, the bank does not actually make any money available to the borrower: No transfer of funds from anywhere to the customer or indeed the customer’s account takes place. There is no equal reduction in the balance of another account to defray the borrower. Instead, the bank simply re-classified its liabilities, changing the ‘accounts payable’ obligation arising from the bank loan contract to another liability category called ‘customer deposits’.</strong></p><p>While the borrower is given the impression that the bank had transferred money from its capital, reserves or other accounts to the borrower’s account (as indeed major theories of banking, the financial intermediation and fractional reserve theories, erroneously claim), in reality this is not the case. <strong>Neither the bank nor the customer deposited any money, nor were any funds from anywhere outside the bank utilized to make the deposit in the borrower’s account. Indeed, there was no depositing of any funds.</strong></p><p>In Step 1 the bank had a liability — an obligation to pay someone. How can it discharge this liability? A law dictionary states:</p><p>“The most common way to be discharged from liability … is through payment.” 1</p><p>And yet, no payment takes place in Step 2 (and hence in the entire ‘lending’ process), which is why the bank’s balance sheet in total remains stuck in Step 1, when all lenders still owe the money to their respective borrowers. <strong>The bank’s liability is simply re-named a ‘bank deposit’</strong>. However, bank deposits are defined by central banks as being part of the official money supply (as measured in such official ‘money supply’ aggregates as M1, M2, M3 or M4). This confirms that banks create money when they grant a loan: <strong>they invent a fictitious customer deposit, which the central bank and all users of our monetary system, consider to be ‘money’, indistinguishable from ‘real’ deposits not newly invented by the banks</strong>. Thus <strong>banks</strong> do not just grant credit, they <strong>create credit, and simultaneously they create money</strong>.</p><p>***</p><p><strong>Instead of discharging their liability to pay out loans, the banks merely reclassify their liabilities originating from loan contracts from what should be an ‘accounts payable’ item to ‘customer deposit’</strong> (in practice of course skipping Step 1 entirely and thus neglecting to record the accounts payable item). The bank issues a statement of its liability to the borrower, which records its liability as a ‘deposit’ of the borrower at the bank.</p><p>***</p><p><strong>What enables banks to create credit and hence money is their exemption from the Client Money Rules. Thanks to this exemption they are allowed to keep customer deposits on their own balance sheet. This means that depositors who deposit their money with a bank are no longer the legal owners of this money</strong>. Instead, they are just one of the general creditors of the bank whom it owes money to. It also means that the bank is able to access the records of the customer deposits held with it and invent a new ‘customer deposit’ that had not actually been paid in, but instead is a re-classified accounts payable liability of the bank arising from a loan contract.</p><p>***</p><p><strong>What makes banks unique and explains the combination of lending and deposit-taking under one roof is the more fundamental fact that they do not have to segregate client accounts, and thus are able to engage in an exercise of ‘re-labelling’ and mixing different liabilities, specifically by re-assigning their accounts payable liabilities incurred when entering into loan agreements, to another category of liability called ‘customer deposits’.</strong></p><p><strong>What distinguishes banks from non-banks is their ability to create credit and money through lending, which is accomplished by booking what actually are accounts payable liabilities as imaginary customer deposits, and this is in turn made possible by a particular regulation that renders banks unique: their exemption from the Client Money Rules</strong>. [Werner gives a concrete example on British law for banking and non-banking institutions.]</p><p>***</p><p>It would appear that those who argue that bank regulations should be liberalized in order to create a level playing field with non-banks have neglected to demand that the banks’ unique exemption from the Client Money Rules – a regulation benefitting only banks – needs to be deregulated as well, so that <strong>banks must also conform to the Client Money Rules.</strong></p><p>***</p><p><strong>Alternatively, one could argue that it would level the playing field, if the banks’ current exemption from the Client Money Rules was also granted to all other firms — in other words, if the Client Money Rules themselves were abolished</strong>. This would allow all firms to also engage in the kind of creative accounting that has become an established practice among banks. It would certainly ensure that competition between banks and non-bank financial institutions would become more meaningful, since the exemption from the Client Money Rules, together with the banks’ deployment of this exemption for the purpose of re-labelling their liabilities, has given significant competitive advantages to banks over all other types of firms: <strong>banks have been able to create and allocate money – virtually the entire money supply in the economy – while no other firm is able to do the same.</strong></p><p>***</p><p><strong>Basel rules were doomed to failure</strong>, since they consider banks as financial intermediaries, when in actual fact they are the creators of the money supply. Since banks invent money as fictitious deposits, it can be readily shown that capital adequacy based bank regulation does not have to restrict bank activity: banks can create money and hence can arrange for money to be made available to purchase newly issued shares that increase their bank capital.</p><p>In other words, banks could simply invent the money that is then used to increase their capital. This is what Barclays Bank did in 2008, in order to avoid the use of tax money to shore up the bank’s capital: Barclays ‘raised’ £5.8 bn in new equity from Gulf sovereign wealth investors — by, it has transpired, lending them the money! As is explained in Werner (2014a), Barclays implemented a standard loan operation, thus inventing the £5.8 bn deposit ‘lent’ to the investor. This deposit was then used to ‘purchase’ the newly issued Barclays shares.</p><p>Thus in this case the bank liability originating from the bank loan to the Gulf investor transmuted from (1) an accounts payable liability to (2) a customer deposit liability, to finally end up as (3) equity — another category on the liability side of the bank’s balance sheet. Effectively, Barclays invented its own capital. This certainly was cheaper for the UK tax payer than using tax money.</p><p>As publicly listed companies in general are not allowed to lend money to firms for the purpose of buying their stocks, it was not in conformity with the Companies Act 2006 (Section 678, Prohibition of assistance for acquisition of shares in public company). But regulators were willing to overlook this. As Werner (2014b) argues, using central bank or bank credit creation is in principle the most cost-effective way to clean up the banking system and ensure that bank credit growth recovers quickly. The Barclays case is however evidence that stricter capital requirements do not necessary prevent banks from expanding credit and money creation, since their creation of deposits generates more purchasing power with which increased bank capital can also be funded.</p><p>In other words, banks have been granted a loophole – not available to other businesses – to use a fiction that the banks’ liabilities are really assets -which has given them a huge competitive advantage over everyone else.</p><p>No wonder banks now literally own the country … including the entire political system.</p><p>But why don’t mainstream economists understand how banks actually create money?</p><p><strong>Economics professor Steve Keen explained last week in Forbes:</strong></p><p>In any genuine science, empirical data like this would have forced the orthodoxy to rethink its position. But in economics, the profession has sailed on, blithely unaware of how their model of “banks as intermediaries between savers and investors” is seriously wrong, and now blinds them to the remedy for the crisis as it previously blinded them to the possibility of a crisis occurring.</p><p>A wit once defined an economist as someone who, when shown that something works in practice, replies “Ah! But does it work in theory?”</p><p>Mainstream economic models are fundamentally wrong. The theories taught in economics programs are riddled with errors. For example, they don’t take into account such basic factors as private debt.</p><p>That’s why the 2008 crash happened … and that’s why the economy is heading south now.</p><p>So things are going to get worse and worse until they’re fixed to account for how banks actually create money.</p><p></p><p></p></div>
Basel 4: The new way to play the dice
https://globalriskcommunity.com/profiles/blogs/basel-4-the-new-way-to-play-the-dice
2015-07-12T14:00:00.000Z
2015-07-12T14:00:00.000Z
Dr Debashis Dutta
https://globalriskcommunity.com/members/DrDebashisDutta201
<div><p><a href="{{#staticFileLink}}8028235682,original{{/staticFileLink}}"><img src="{{#staticFileLink}}8028235682,original{{/staticFileLink}}" width="286" class="align-full" alt="8028235682?profile=original" /></a>In next couple of years there will be sweeping changes to existing Basel III Accord what will pave way for a new game changing regime called Basel 4. In obvious intent, the new Accord will raise risk-based capital ratio, revise risk weighting and move away from too much emphasis on model-based approach. One of key measures will be leverage Ratio.</p><p></p><p>It will stay ahead of 3% ratio as a front-stop measure. Another key measure will be balancing risk sensitivity with simplicity in the new regime. The Basel Committee has already come out a consultation paper on the advantages of greater simplicity which gives the directions how to move out of current high level of complexity.</p><p></p><p>Another area is addressing complexity of risk weights by internal model which is also an important issue during financial crisis. To address the same, the Basel committee has come out with a paper on Fundamental Review of Trading Book which talks about considerable difference of risk weighting between banking book and trading book and the way forward. In respect of capital buffers, many countries like Australia and the UK are proposing to require Pillar 2 capital through CET1 capital, rather than through a combination of tier 1 and tier 2 capital.</p><p></p><p>This gives more loss absorbing capability of core capital paving the way for more financial stability. In liquidity measures, there have been enhancements by regulators in different geographies. In the UK, Prudential Regulatory Authority is proposing additional liquidity requirement from systemic point of view for Liquidity Coverage Ratio. So LCR and NSFR will be stabilised further. more in new regime. Furthermore, the Macro-prudential issues like surcharge for global systemically important banks will be an add on to the new Basel regime.</p><p></p><p>This will reduce contagion risk. This will tighten the large exposure measures for appropriate oversight. The bailing out of banks by government has been issue during and post financial crisis. There are astute possibilities to include the recovery and resolution issues in new Basel Accord. EU Bank Recovery and Resolution Directive (BRRD) and FSB guidance will have impact in new regime. Another change be more stringent risk disclosure the of the use of internal models on a bank’s regulatory capital.</p><p></p><p>This will create more transparency. In summary, the Basel 4 will address the above issue increasing stability and transparency of financial system, with sweeping changes, pre-empting chances of government bail out of banks or sovereign default.</p></div>
Discussing Retail Deposits: an Interview with Silvio Stroescu
https://globalriskcommunity.com/profiles/blogs/discussing-retail-deposits-an-interview-with-silvio-stroescu
2015-02-12T20:32:39.000Z
2015-02-12T20:32:39.000Z
marcus evans N.A. Conferences
https://globalriskcommunity.com/members/marcusevansNAConferences
<div><p class="TitleA" align="left"> <a href="{{#staticFileLink}}8028231468,original{{/staticFileLink}}"><img src="{{#staticFileLink}}8028231468,original{{/staticFileLink}}" width="212" class="align-left" alt="8028231468?profile=original" /></a>Low interest rates, new regulations and an unstable economic situation have impacted revenues and profits of retail deposits in North America. Therefore, the upcoming <b>GFMI</b> 3<sup>rd</sup> Edition <a href="http://www.global-fmi.com/SSinterview">Retail Deposit Optimization & Strategic Management Conference</a> comes at a very important and optimal time for banks.</p><p class="TitleA" align="left"> </p><p class="TitleA" align="left"><b>Silvio Stroescu,</b> Managing Director, Investments & Deposits at Tangerine Bank recently spoke with <b>GFMI</b> about key topics to be discussed at this upcoming meeting, scheduled to take place April 27-29, 2015 in Toronto, Canada.</p><p class="TitleA" align="left"> </p><p class="TitleA" align="left"> </p><p><b>Why are retail deposits such a key issue at the minute for banks?</b></p><p>New regulatory requirements, such as Basel III, are putting more emphasis on retail deposits and the value these bring to a Bank’s stability. </p><p>In addition, central banks around the world plan to take an even more stringent approach than the new regulatory standards, which will further emphasize the value of retail deposits versus other funding means, such as wholesale funding.</p><p>These new requirements are leading to increased competition for retail deposits.</p><p><b>Why is it key for institutions now to differentiate their retail products from competitors?</b></p><p>Banks have traditionally been focused on the distribution of financial services as their primary business, with the products taking a bit of a backseat. Consumers would walk into a branch to ‘do their banking’ and in the process end up ‘purchasing products’. As a result, banks were primarily competing on their distribution strategy. As long as a Bank had a strong foothold in the community, it was likely to bring people into the branch then sell them the products.</p><p>With the advances in technology and especially the emergence of mobile apps, consumer behaviour shifted drastically over the past few years. We are at a crossroads now where we see a Bank’s ‘distribution’ strategy threatened by the emergence of non-bank competitors like PayPal, Square and Google Wallet. </p><p>People no longer have to go somewhere to ‘do their banking’; they now have branches in their pocket. This leaves the banks vulnerable on the distribution side of the business, as they appear to be falling behind the innovative solutions developed by non-banks who specialize in understanding consumer behaviour.</p><p>Banks must now focus on creating differentiated products which are a fit for the new distribution norms and add significant value over the competition. </p><p>While the products still represent ‘the thing’ consumers hire to meet their financial goals, the hiring decision is no longer defaulted by the branch they chose to visit. Product constructs must be simpler and easier to understand and use by the increasingly self-reliant consumer in the smartphone age.</p><p>Not only do consumers have access to more choices, they are also more likely to research their options and rely on advice from peers. With the increased choice and transparency, in order to get the nod over the competition and attract the accolades of positive peer reviews, the banks must provide superior products which stand out from the crowd.</p><p> </p><p><b>How is pricing being used to help with attracting and retaining customers?</b></p><p>Pricing has been the cornerstone of a product’s value proposition. A significant price advantage over the competition has proven to be sufficient motivation for consumers to uproot their savings, as evidenced by the success of ING and Ally. </p><p>While the prolonged low interest rate environment has led some consumers to lean towards a higher allocation of their wealth to equities, it has also led those who cannot afford increased risk in their portfolios to become even more price sensitive. Consumers in need of liquidity are more likely to respond to a slight price advantage and even chase short term promotional offers to maximize their absolute returns.</p><p>This increase in consumer sensitivity to price, complemented by lower margins for the banks due to the current interest rate environment has made pricing strategies even more critical to a bank’s success. </p><p>Banks rely more on promotional pricing to attract new deposits these days, in the hopes of retaining these funds once the promotional period expires. While this may be a lucrative short term tactic, it’s not going to provide sustainable growth unless complemented by more holistic pricing strategies to deepen relationships overall.</p><p><b>What do you think attendees will gain from attending this event?</b></p><p>The event provides opportunities for attendees to hear from experienced speakers and connect with peers facing similar industry wide challenges.</p><p>When an industry as a whole is at a crossroad, I find the conversations at these types of events often inspire great thinking and lead to golden nuggets which can provide a competitive advantage once applied within the context of a bank’s own unique value proposition.</p><p class="Default"><b>Silvio Stroescu</b> will be leading the breakout session “Effective Strategies to Strengthen Customer Acquisition and Retention” and will be contributing to the panel discussion “Achieving Differentiation from Competitor Products” on Tuesday, April 28<sup>th</sup> at the GFMI 3<sup>rd</sup> Edition <a href="http://www.global-fmi.com/SSinterview">Retail Deposit Optimization & Strategic Management Conference</a>.</p><p class="Default"> </p><p class="Default">For more information regarding this conference, including pricing and registration, please contact Abby Wilson, Media & PR Coordinator at (312) 894.6313 or <a href="mailto:abbyw@global-fmi.com?subject=GFMI%20Retail%20Deposits%20Conference%20-%20SS%20Interview">abbyw@global-fmi.com</a>.</p><p class="Default"> </p><p class="Default"><b>About Silvio</b> <b>Stroescu</b></p><p class="Default"><b> </b></p><p><i>Silvio’s entire world changed when he moved from Romania to Canada in the late 80s. His adaptable personality helped him manage this change and while adopting a new culture and mastering a new language he studied Mathematics and Psychology at the University of Toronto. Subsequently, he worked for a number of Bay Street firms in Toronto’s financial district.</i></p><p><i>In 1997, he was captivated by a new venture in direct banking, ING DIRECT, which he recognized as a potential game changer in the Canadian financial services industry. He progressed through a series of increasingly senior positions across the organization, including leadership roles in Sales, Operations, Project Management and Retail Experience. During his tenure with ING DIRECT, Silvio developed new business lines, brought new products to the Canadian market, led through change, managed business transitions and shared global best practices on direct banking with international colleagues. </i></p><p><i>In his current role as Managing Director of Investments & Deposits, Silvio provides strategic leadership towards the development of Tangerine Bank’s deposit business line, as well as its investment asset management and distribution subsidiaries. His general management responsibilities include overall business line strategy, product management and P&L accountability.</i></p><p class="Default"><b>About Global Financial Markets Intelligence</b></p><p class="Default"><b> </b></p><p><i>GFMI is a specialized provider of content-led conferences for the financial markets. Carefully researched with leading financial market experts, our focused quality events deliver key bottom-line value through targeted presentations, interactive discussions and high-level networking opportunities.</i></p></div>
Corporate governance in banks : Basel and the Big Jigsaw Puzzle
https://globalriskcommunity.com/profiles/blogs/corporate-governance-in-banks-basel-and-the-big-jigsaw-puzzle
2014-11-30T15:00:00.000Z
2014-11-30T15:00:00.000Z
Dr Debashis Dutta
https://globalriskcommunity.com/members/DrDebashisDutta201
<div><p><span>The Basel Committee on Banking Supervision has circulated a consultative document on corporate governance principles for banks in October 2014, issued for comments by 9th January 2015. This is an enhanced version of earlier paper issued in 2010 in response to credit crisis.</span></p><p></p><p><span>The main objective of corporate governance to enhance long-term shareholders’ value through right oversight mechanism. However, the implementation of corporate governance has always been a challenge, considering the opacity and complexity of the governance structure of the banks, along with the growing challenges in regulatory interface. The corporate governance in banks is unlike that in non-financial intuitions, as the bank can alter the risk compositions of the assets more than non-financial institutions. Further, the operations of the banks are more complex than that of non-financial institutions, generally. Studies on financial crisis showed evidence of relationship between default and influence of corporate governance structure on risk taking.</span></p><p></p><p><span>The governance objective of the bank to maximise shareholders’ wealth by taking good risk only. So there has a growing need to differentiate between good risk and bad risk, where corporate governance plays a crucial role. Risk appetite statement (RAS) is a board level document. It defines what risks a bank should take as the banks intend to avoid or mitigate bad risks. Risk appetite assesses the level of additional risk for additional opportunities. Good Corporate governance essentially means the bank understands and keeps right amount of good risks. Credit crisis is a natural experiment for risk in the governance.</span></p><p></p><p><span>The lesson learnt is good governance essentially means less bank failure. There are many talks around involvement of shareholders in governance process. However it is evidenced that more involved CEO led to better governance as his/her survival is dependent on the success of the bank. There are several discussion going around on independence of risk managers An elevated Chief Risk Officer (CRO) is crucial for good corporate governance. Higher that status of Chief Risk Officer lesser the risks for the bank. There is also a need to put in place of an entranced process rather than just policy. The process needs to ensure that the risk manager reports independent of the business lines that he/she is monitoring. Other important areas are risk quantification and risk organisation. Differentiation between good risk and bad risk, and risk aggregation across different risks bank wide, need to be ensured. Risk organisation structure should be optimal for the bank with visibility of right decision making process. Risk organisation is bank-specific as it differs from bank to bank. Shareholding patterns also have an impact.</span></p><p></p><p><span>The lower-level managers with considerable shareholdings and direct influences on the bank’s daily operations may take on more risk for moral hazard problem. Independence of board directors and quality of independent director is crucial for corporate governance. Especially for the independent director enjoys a higher public visibility and is subject to reputation risk for default of the bank. This ensures more involvement of the independent director. No evidence is found on the relationship between board size and performance of the bank.</span></p><p></p><p><span>The board should be well qualified to challenge the management of the bank on risk governance. However, a reputed financial institution, in question during credit crisis, had a board containing a former CEO, a top fund manager, and a previous member of the Bank of England’s governing body. Despite of these, the financial institution could not perform well in credit crisis. Another point is risk culture. Risk culture is needed to be built in the process accessible to everybody in the organisation.</span></p><p></p><p><span>The effectiveness of corporate governance is also reflected in market discipline. Disclosures assume importance to all as many of the banks are too complex in structure to understand, which raises “too-complex-to-fail” problem. Regarding compensation, the bank’s board should measure the effect of compensation on the bank’s solvency which necessitates building right metrics. During the financial crisis, it was found that compensation with higher-risk taking incentives worked against the right governance. The excess risk taking by CEO may be controlled by linking CEO’s compensation to the bank's CDS spread.</span></p><p></p><p><span>A peer review conducted by Financial Stability Board (FSB) in 2014 says that banks have made good progress in improving corporate governance. However, many issues to needs to be raised and resolved. So, let us wait to see the comments to be received from the banks on the BCBS paper on the corporate governance in banks under consultation.</span></p></div>
SMEs Dance to the Basel III Shuffle
https://globalriskcommunity.com/profiles/blogs/smes-dance-to-the-basel-iii-shuffle
2014-04-14T19:00:00.000Z
2014-04-14T19:00:00.000Z
James McCallum
https://globalriskcommunity.com/members/JamesMcCallum
<div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;"><a href="https://lh4.googleusercontent.com/wcPLIWXU8BSBu7aTpFCKwL6A2enSAXzUsXbalfGg0UnMZk8fLkRZR1g9RpONSjC1htx7XQLBy8e3YK700rRUWjTd1mVhiPfzjaFOUXvodVAqZsOXoF6bDcQkbwDDKHv7Rg" style="clear:right;float:right;margin-bottom:1em;margin-left:1em;"><img alt="cap structure sme eu.PNG" border="0" height="318" src="https://lh4.googleusercontent.com/wcPLIWXU8BSBu7aTpFCKwL6A2enSAXzUsXbalfGg0UnMZk8fLkRZR1g9RpONSjC1htx7XQLBy8e3YK700rRUWjTd1mVhiPfzjaFOUXvodVAqZsOXoF6bDcQkbwDDKHv7Rg" style="border:none;" width="400" /></a></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">I often wonder, what if Basel II capital accords had been in place prior to the Great Recession? </span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Could the devastating crisis fueled by the serial pops of credit bubbles rumbling through the dismal landscape of G20 principalities been avoided with better capital adequacy safeguards? </span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Could the precious Post Cold War peace dividend been preserved; had the fiduciaries of global solvency not toppled the dominoes of economic prosperity and political stability through extreme selfishness and irrational behavior?</span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Some economists assert that had the guidelines of Basel II been in place it would not have mattered. That may certainly be true, but one is still left to wonder if Systemically Important Financial Institutions (SIFI) had followed better governance frameworks the fissures emanating from the epicenter of the global economic meltdown would not have been as deep or as widespread.</span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">The lessons learned from the crisis are being codified in the new governance frameworks of Basel III. Whereas previous Basel Accords focused on capital adequacy and loss reserves aligned to risk weighted assets and counterparty exposures, Basel III looks to strengthen capital adequacy by addressing liquidity and leverage risk in the banks capital structure. Basel III recognizes the primacy of mitigating the systemic risk concentrated in the capital structure of a SIFI and lesser designees, and the contagion threat it poses on its counterparties and the greater economy. </span></div><div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">To ally solvency concerns, Basel III installs a leverage ratio and bolsters its Liquidity Coverage Ratio (LCR) which will require all banking institutions to increase its regulatory capital reserves of High Quality Liquid Assets (HQLA). An increase in HQLA reserves will raise the cost of capital for all financial institutions requiring it to raise its spreads on credit products. </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">SMEs will be particularly affected by Basel III initiatives. SME’s are highly dependant on bank capital and credit products and remain highly sensitive to the cyclicality of macroeconomic factors. D&B’s Small Business Health Index reports that SME business failures in the US were in excess of 140,000 per month in 2013. The OECD reported that during 2012 over 800,000 EC SME’s closed shop in 2012. </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Eurofact reported that 60% of all non-financial value add to the EC economy is attributable to SMEs. Though SMEs are generally recognized as principal economic drivers in both the developed and lesser developed economies; during the economic crisis SME’s were rationed out of the credit markets. Large capital infusions and accommodative monetary policy by the central bank authorities principally sought to bolster bank capital and inject liquidity into the faltering global banking system. </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">As such much of the low cost capital provided to banks did not trickle down to SMEs. Better returns were realized by deploying capital to investment partnerships, energy resource development, the acquisition of strategic commercial enterprises and underwriting speculative trading in the global security markets. </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Little of the low cost capital found its way onto Main Street; driving the bifurcating wedge between the real and speculative economy. As a more conservative political landscape emerges from the wreckage of the economic calamity created by “elitist” financial institutions and “remote” Brussels based government bureaucrats, the cause of the SME is resonating in the rising voice of a middle class spoken with a distinct nationalist accent. </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Politicians, legislators and advocacy groups are fully invested in the cause of the SME. Stakeholders are advocating more government involvement to underwrite and guarantee sponsored loans. In an era where government involvement in markets is under severe attack, political expediency and prudent economics coalesce to fund the incubation of SMEs. Even if greater government intervention is counterintuitive to laissez faire proclivities of the politically engaged, higher taxes would be required to fund the risk of capital formation initiatives. The securitization of SME loans is also a consideration; but aversion to leverage and the risk to encourage poor lending practices raise fears of creating yet another credit bubble.</span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">The Government of Singapore recently rose its guarantee on SME loans to cover 70% of principal in response to the increase in cost of capital banks will charge as a result of Basel III. Spreads on SME loans are estimated to increase between 50 to 80 basis points. This rise in the cost of capital will allow banks to recoup Basel III compliance expenses associated with the segregation of regulatory capital requirements to service SME loan portfolios.</span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">The risk premia on SME loans is justified by regulators because it guarantees the availability of credit through the business cycle. The financial health of SME’s are highly correlated to the vicissitudes of the business cycle. During times of cyclical downturns risk factors for SMEs are magnified due to the prevalence of concentration risk in products, regions, markets, client and critical macroeconomic factors germane to the SME’s business. Mitigation initiatives are inhibited due to liquidity constraints, resource depletion and balance sheet limitations. The closure of credit channels exacerbates this problem and Basel III risk premia pledges to fund SMEs through a trying business cycle.</span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">To maintain profitability of SME lending, banks will enhance quality standards and haircut collateral margins; a potentially onerous demand since asset valuations remain severely distressed from the effects of the Great Recession. Banks will avoid SMEs with enhanced risk profiles, make greater use of loan covenants, expand fee based services and hike origination fees to protect margins and instill enhanced credit risk controls to minimize default risk.</span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">As the strictures of Basel III take root within commercial banks alternative credit channels are opening to better match an SME’s credit requirements and market situation with a financial product that best addresses their business condition. D&B has initiated a timely capital formation initiative for SMEs. Access to Capital - Money to Main Street is an event tour that is bringing together regional providers of funding for SMEs and startups. </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">The economic recovery is combining with technology to energize innovations in SME funding options. Crowd-funding, micro-lending, asset financing, leasing, community bank loans, credit unions and venture capital channels are a few of the many options available for small business funding. Each channel offers distinct terms and advantages that match a funding option to the specific situation of an SME. </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">SME associations and advocacy groups are surfacing in the EU that seek to harness the residual capital created by SME failures. Second Chance and Fail2Suceed are initiatives that seek to harness the intellectual capital garnered by entrepreneurs in unsuccessful enterprises. It is a clear recognition that a great failure can be the mother of greater wisdom. This may augur well for the success of Basel III as it seeks to build on the shortfalls of its forebears to better protect the global banking system as it promotes the wealth of nations by equitably funding the growth of the global SME segment.</span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div style="text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Sum2 offers a portfolio of risk assessment applications and consultative services to businesses, governments and non-profit organizations. Our leading product Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to manage enterprise risk and attract capital to fund initiatives to achieve business goals. Credit Redi helps SMEs improve credit standing to demonstrate creditworthiness to bankers and investors. On Google Play:</span> <a href="/" style="font-family:Arial, Helvetica, sans-serif;">Get Credit|Redi</a></div><div style="text-align:justify;"></div><div style="text-align:justify;"></div><div><div><a href="https://play.google.com/store/apps/details?id=com.wCreditRediMobileOffice" style="color:#6699cc;text-decoration:none;"><img border="0" src="https://images-blogger-opensocial.googleusercontent.com/gadgets/proxy?url=http%3A%2F%2F3.bp.blogspot.com%2F-gV9F96ANq94%2FUz2hAQy5mrI%2FAAAAAAAAEzw%2F5sQVfyDcmkI%2Fs1600%2Fcredit%2Bredi%2Blogo%2B100.png&container=blogger&gadget=a&rewriteMime=image%2F*" style="border:none;" alt="proxy?url=http%3A%2F%2F3.bp.blogspot.com%2F-gV9F96ANq94%2FUz2hAQy5mrI%2FAAAAAAAAEzw%2F5sQVfyDcmkI%2Fs1600%2Fcredit%2Bredi%2Blogo%2B100.png&container=blogger&gadget=a&rewriteMime=image%2F*" /></a></div><div style="background-color:#FFFFFF;color:#333333;font-family:Arial, Helvetica, sans-serif;font-size:15px;line-height:20.790000915527344px;text-align:justify;"><a href="https://play.google.com/store/apps/details?id=com.wCreditRediMobileOffice" style="color:#6699cc;text-decoration:none;">Get Credit|Redi</a></div></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;"> </span></div><div dir="ltr" style="margin-bottom:0pt;margin-top:0pt;text-align:justify;"><span style="font-family:Arial, Helvetica, sans-serif;">Risk: SME, Basel III, commercial lending, political stability, economic growth, USA, EU, alternative credit channels, credit risk, global banking, business failure, OECD, SIFI</span><br /> <span style="font-family:Arial, Helvetica, sans-serif;"><br /></span> <span style="background-color:#FFFFFF;color:#333333;font-family:Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif;font-size:13px;line-height:19px;">This article </span><span style="color:#222222;">was originally released on DaftBlogger. </span></div></div></div>
Singapore Sling: Basel III Amps SME Credit Risk
https://globalriskcommunity.com/profiles/blogs/singapore-sling-basel-iii-amps-sme-credit-risk
2014-03-23T01:00:00.000Z
2014-03-23T01:00:00.000Z
James McCallum
https://globalriskcommunity.com/members/JamesMcCallum
<div><p></p><div style="font-family:Arial, Helvetica, sans-serif;font-size:16px;text-align:justify;"><p dir="ltr"><span><a href="{{#staticFileLink}}8028230075,original{{/staticFileLink}}"><img src="{{#staticFileLink}}8028230075,original{{/staticFileLink}}" width="120" class="align-left" alt="8028230075?profile=original" /></a>SME lending just got more expensive in Singapore. Basel III capital requirements has increased the risk weighting on SME loans. Banks are now required to set aside more capital to protect against SME loan defaults. This will drive up the cost of capital for SME’s as lenders pass on added costs to borrowers to maintain healthy margins on SME loans; Singapore’s</span> <a href="http://www.businesstimes.com.sg/premium/top-stories/basel-iii-wont-shift-spore-banks-focus-smes-20140324"><span>Business Times</span></a> <span>reports.</span></p><span><span><br /></span></span><p dir="ltr"><span>SME’s are a critical driver of economic growth in Singapore. Bank loans to the segment grew more than 10% in 2013. At DBS Bank, SME lending produced a $1.8 billion increase in revenue.</span></p><span><span><br /></span></span><p dir="ltr"><span>The Government of Singapore has long been friendly to SME's and remains committed to support the segment as a keystone to the economic recovery of this vibrant Asian Tiger. The government has maintained a risk sharing program to guarantee 50% of an SME loan. Due to the increase in the loan loss reserves mandated by Basel III; the government will now increase its risk share to 70%. It is hoped that this will protect the the flow of capital to SME's. </span></p><span><span><br /></span></span><p dir="ltr"><span>This regulatory initiative is another example of the compounding macroeconomic risk factors confronting SME’s. Shifts in credit market conditions and healthy functioning credit channels are major risk factors for SME’s. Acute macro risk, forces market players to compete for capital during restrictive business cycles. SME’s must assess macroeconomic risk factors surrounding the capital funding landscape to maintain profitability.</span></p><span><span><br /></span></span><p dir="ltr"><span>Get risk aware with Macroeconomic Risk and Event App (MERA) on Google Play; a Mobile Office app that runs on MS Office and Android. MERA helps SME's assess emerging risk factors to profit from the opportunities shifting markets present.</span></p></div><div style="font-family:Arial, Helvetica, sans-serif;font-size:16px;text-align:justify;"></div><div style="font-family:Arial, Helvetica, sans-serif;font-size:16px;text-align:justify;"><span><span><br /></span></span><div dir="ltr"><table width="764"><colgroup><col width="574" ></col></colgroup><tbody><tr><td><p dir="ltr"><span><img src="https://lh4.googleusercontent.com/GUt0HXqWYmVfKFxeGFEZI9zt0VS6cmarWaBWCAHGV8a6y2HYOoJ2_bw5EfyzMfsQoUUSsFwb5PIeRuPPsfyMw1UpSa6gdaB5OlKLVBHeNinKgG5Yj9Hmx9_z4Mda8bajdQ" alt="GUt0HXqWYmVfKFxeGFEZI9zt0VS6cmarWaBWCAHGV8a6y2HYOoJ2_bw5EfyzMfsQoUUSsFwb5PIeRuPPsfyMw1UpSa6gdaB5OlKLVBHeNinKgG5Yj9Hmx9_z4Mda8bajdQ" /></span></p></td></tr><tr><td><p dir="ltr"><a href="https://play.google.com/store/apps/details?id=com.wMacroeconomicEventRiskApp&hl=en"><span>Get Risk Aware</span></a></p><br /><p dir="ltr"><span>risk: sme lending, regulatory, credit risk, Basel III, Singapore, DBS Bank, OCBC, UOB, macroeconomic risk, Strait Times, Singapore Business Times, government spending</span></p></td></tr></tbody></table></div><table align="center" cellspacing="0" class="tr-caption-container" style="float:left;margin-right:1em;text-align:left;"><tbody><tr><td class="tr-caption" style="font-size:13px;"><br /><div><span id="docs-internal-guid-697c2f8e-f5f1-9594-c63e-9cf949d58f89"></span><br /><div><span><span style="font-family:Arial;font-size:15px;vertical-align:baseline;white-space:pre-wrap;"> </span></span></div><span></span></div></td></tr></tbody></table></div></div>
Tackling Risk Management Technology Challenges: Front-to-Back Integration of Risk Management Systems
https://globalriskcommunity.com/profiles/blogs/tackling-risk-management-technology-challenges-front-to-back
2013-11-27T13:00:00.000Z
2013-11-27T13:00:00.000Z
SecondFloor
https://globalriskcommunity.com/members/SecondFloor
<div><p>Integration is a hot topic this year for risk professionals. In PRMIA’s <a href="http://www.prmia.org/sites/default/files/private/survey/Sungard-BuySideTrends2013.pdf" target="_blank">2013 survey of buy-side risk management trends, a</a> lack of front-to-back integration of systems emerged as the second biggest technology challenge, pipped only by the need to create a complete view of risk from multiple risk systems.</p><p><strong>Poor integration compromises risk management quality</strong></p><p>Why the need for front-to-back integration? The financial and Eurozone crises have highlighted the need to manage risk more proactively and in a more holistic way. If there’s nothing linking risk management systems to the transactional systems used daily to run the business – portfolio management systems, trading systems, policy management systems – the danger is that risk management is something that’s applied to the business in retrospect, rather than actively governing what gets bought and sold at any given moment.</p><p>As one respondent to the PRMIA’s survey put it: “<em>Risk has always been a business driver – though a back-seat driver.</em>”</p><p>What’s more, if transactional systems are divorced not only from risk systems but also from each other, there’s also a danger that the business may miss vital concentration risks – if there is no single view of the organisation’s exposure to a given country, asset class or counterparty, for example.</p><p><strong>Lack of integration makes data gathering an arduous task</strong></p><p>Perhaps most importantly, running a patchwork of disconnected systems makes it an incredibly arduous task to gather data from them when it’s needed – either for internal risk management or for external regulatory reporting.</p><p>We’ve written previously about the <a href="http://www.secondfloor.com/whitepaper/risk-data-aggregation" target="_blank">challenge of gathering data from disparate systems to perform risk management calculations</a>. One of the problems is that there can be huge differences from system to system, in everything from date formats and taxonomies to the risk categories that different products and assets are assigned to. All of that data needs to be standardised before any kind of meaningful calculation can be performed. </p><p>Another challenge is gathering the data in a timely fashion. What often happens is that when a consolidated risk report needs to be created, data is extracted manually from the different systems into a multitude of spreadsheets, which are then send to Risk for manual re-entry into the calculation engine. As well as creating the potential for huge errors and inconsistencies, this approach also means that if someone is on holiday or sick, vital data may not be received in time.</p><p>A third challenge is data quality. With regulators pressing banks and insurers to develop firm-wide risk management systems and controls, firms must be able to demonstrate that they have a data governance framework in place to ensure the data gathered is always traceable, accurate and reliable. Relying on manual validation methods (like emailing people for their approval or to query a data point) is incredibly inefficient and time-consuming – and may not satisfy the regulator, either.</p><p><strong>Integration is vital – but it doesn’t need to be a huge IT project</strong></p><p>All of these challenges reinforce the need for greater integration between front-office and back-office systems. Fortunately, there’s a quicker and easier way to integrate front and back-office systems than building custom integrations between each one, implementing a central data warehouse, or consolidating on fewer systems across the business.</p><p>Many of Europe’s largest banks and insurers are using eFrame© from SecondFloor to orchestrate and automate the collection of data from source systems, and to create an automated data governance framework to ensure the data collected is approved, traceable, and gathered in a timely manner. It’s faster and less disruptive to implement than the more traditional integration methods outlined above, and also means organisations do not have to sacrifice any existing systems.</p><p><strong>Find out more</strong></p><p><strong>If you’d like to know more about how eFrame© can help with your integration challenges, we’re happy to offer an initial phone consultation free of charge. Call us on +31 (0) 88 26 35 463 or </strong><strong>email <a href="mailto:info@secondfloor.com">info@secondfloor.com</a>, and we will be glad to help.</strong></p><p></p></div>
Tackling Risk Management Technology Challenges: Gaining a Complete View of Risk from Multiple Systems
https://globalriskcommunity.com/profiles/blogs/tackling-risk-management-technology-challenges-gaining-a-complete
2013-11-27T13:00:00.000Z
2013-11-27T13:00:00.000Z
SecondFloor
https://globalriskcommunity.com/members/SecondFloor
<div><p>As financial institutions have become more complex, so have their risk management systems – and that’s a problem.</p><p>Organisations that have grown through acquisition and diversification typically find themselves running a huge number of different systems: whether for different asset classes, different types of risk and/or for different operating entities.</p><p>That complexity is causing major issues. Research carried out by the <a href="http://www.prmia.org/sites/default/files/private/survey/Sungard-BuySideTrends2013.pdf" target="_blank">Professional Risk Managers International Association (PRMIA) in March 2013</a> revealed that “getting a complete view of risk from multiple risk systems” is the top technology challenge faced by buy-side firms.</p><p>As the regulatory environment tightens in the wake of the financial crisis, it’s a challenge that firms can’t afford to ignore. Trying to aggregate data from different risk systems into a single view is fraught with issues. The variations between systems lie not only in the types of model used to calculate the risk, but also in the way the underlying data is structured and handled.</p><p><strong>Risk management horror stories</strong></p><p>Horror stories abound: one firm found its balance sheet to be inaccurate to the tune of several billion euros because it had misinterpreted a scaling factor used by one of its operating entities. Errors like this can easily occur in a highly complex systems environment, and the possibility that the data may not be 100% accurate means senior management end up making critical business decisions based on data that they do not wholly trust.</p><p>With supervisors taking a keener interest in how risk is calculated and aggregated, more than three-quarters of the companies polled by PRMIA said they planned to change their risk management systems in an attempt to gain an accurate, traceable and dependable enterprise-wide view of risk.</p><p><strong>Two common approaches: neither very attractive</strong></p><p>It’s not a project that many organisations relish, however. Traditionally, the two most common ways of achieving (or trying to achieve) a single view of risk are:</p><p>1. A “Big Data” approach, where multiple separate systems are thrown out and replaced with one single enterprise-wide risk management system.</p><p>2. A “Big Piping” approach, where data from the existing systems is “piped” into a central data warehouse for the relevant calculations and analysis to be performed.</p><p>In practice, the first of these almost always turns out to be prohibitively expensive and disruptive. As well as being a huge and highly risky IT project, it also means that many perfectly serviceable systems – often home-grown ones with advanced, proprietary models – are sacrificed for the greater good.</p><p>The second is generally the preferred approach, but implementing a central warehouse and integrating existing systems with it is also a long, expensive and cumbersome project. (One insurer we know found that after 18 months of work, it was still only in a position to bring 20% of its risk data into the data warehouse).</p><p><strong>European institutions are choosing a third way</strong></p><p>At SecondFloor we have pioneered a third way, and it’s already being used to accurately manage and aggregate risk data at some of Europe’s largest and most complex financialinstitutions. Our data orchestration tool, eFrame, works with existing risk systems to standardise the data and create a complete, automated governance framework so that every data point is checked, approved and traceable to its source. Senior management can then conduct the relevant analyses on data they know is accurate and reliable.</p><p>That’s important not just for complying with regulations ranging from Basel III and Solvency II to IFRS IV and IX – but also, and most importantly, for the quality of internal risk management. When everyone can agree on a single set of risk data, aggregated accurately from the multiple risk systems present in the business, then the tasks of setting risk tolerance parameters, creating a risk dashboard and allocating economic capital all become incomparably easier.</p><p></p><p><strong>Find out more</strong></p><p><strong>If you’d like to know more about how eFrame© can help your organisation to gain a consistent, accurate and dependable view of risk, we’re happy to offer an initial phone consultation free of charge. Call us on +31 (0) 88 26 35 463 or email <a href="mailto:info@secondfloor.com">info@secondfloor.com</a>, and we will be glad to help.</strong></p><p></p></div>
Basel Committee Ushers in Next Phase of Enterprise/Integrated Risk Management
https://globalriskcommunity.com/profiles/blogs/basel-committee-ushers-in-next-phase-of-enterprise-integrated
2013-08-29T13:06:53.000Z
2013-08-29T13:06:53.000Z
SecondFloor
https://globalriskcommunity.com/members/SecondFloor
<div><p>The Basel Committee, which creates regulations for banks, has published a set of principles regarding effective risk data aggregation and risk reporting, which will provide a fantastic business case for risk professionals to improve their risk frameworks. I’ve included highlights below, but you can take a look at the full report<a href="http://www.bis.org/publ/bcbs239.pdf" target="_blank"> here.</a></p><p>The principles for effective risk data aggregation and risk reporting will be mandatory for globally systemically important banks (G-SIBs) from 2016, and the Basel Committee recommends that national regulators make them mandatory for domestically systemically important banks (D-SIBs). There are currently 29 G-SIBs, and D-SIBs will probably be the top four or five largest and/or most complex banks in each country. Beyond this, I believe the principles in the Basel document will become an industry standard by which all banks will be assessed by institutional investors and during due diligence processes for mergers and acquisitions.</p><p><strong>The Basel Committee’s principles cover four closely related topics, and are common sense, though not easily attainable: </strong></p><p>• Overarching governance and infrastructure </p><p>• Risk data aggregation capabilities </p><p>• Risk reporting practices </p><p>• Supervisory review, tools and cooperation </p><p>A couple excerpts from the report that will resonate with most practitioners explain why the principles are necessary. These explanations will come in handy as ‘I-told-you-so’ introductions to many a business case for the next steps in enterprise/integrated risk management frameworks and in business analytics at group level (because it’s ultimately the board and senior management that own this challenge):</p><p>• Ensure that management can rely with confidence on the information to make critical decisions about risk.</p><p>• Accurate, complete and timely data is a foundation for effective risk management. However, data alone does not guarantee that the board and senior management will receive appropriate information to make effective decisions about risk. To manage risk effectively, the right information needs to be presented to the right people at the right time. Risk reports based on risk data should be accurate, clear and complete. They should contain the correct content and be presented to the appropriate decision-makers in a time that allows for an appropriate response.</p><p><strong>Other elements within the principles that point to some solid professional challenges are:</strong></p><p>• Supervisors observe that making improvements in risk data aggregation capabilities and risk reporting practices remains a challenge for banks, and supervisors would like to see more progress</p><p>• These risk reporting capabilities should also allow banks to conduct a flexible and effective stress testing which is capable of providing forward-looking risk assessments</p><p>• When expert judgment is applied, supervisors expect that the process be clearly documented and transparent</p><p>• A bank’s board and senior management should promote the identification, assessment and management of data quality risks as part of its overall risk management framework.</p><p>• A bank’s risk data aggregation capabilities and risk reporting practices should be fully documented and subject to high standards of validation.</p><p>• Capabilities to incorporate new developments on the organisation of the business and/or external factors that influence the bank’s risk profile</p><p>• Risk management reports should accurately and precisely convey aggregated risk data and reflect risk in an exact manner. Reports should be reconciled and validated</p><p>The Basel principles for effective risk data aggregation and risk reporting might not look 100% practical for inclusion in the real world, as opposed to a wish-list paper exercise, but at SecondFloor we believe it creates the right mindset.</p><p><strong>The list of globally systemically important banks</strong>, it is created by the Financial Stability Board, and can be found at: <a href="http://www.financialstabilityboard.org/publications/r_121031ac.pdf">http://www.financialstabilityboard.org/publications/r_121031ac.pdf</a>. This latest list was created in Nov 2012 and will be updated again in Nov 2013.</p><p><strong><a href="http://info.secondfloor.com/ContactUs.html" target="_blank"><span>For more about SecondFloor’s solution for efficient analytics and critical and regulatory reporting, and how it can help with integrated risk management contact SecondFloor today.</span></a></strong></p><p><span> </span></p></div>
New guidance for systemically Important banks adds to the data management burden
https://globalriskcommunity.com/profiles/blogs/new-guidance-for-systemically-important-banks-adds-to-the-data
2013-08-29T12:49:51.000Z
2013-08-29T12:49:51.000Z
SecondFloor
https://globalriskcommunity.com/members/SecondFloor
<div><p><em>The new category of domestic systemically important banks will increase the data management and disclosure burden on qualifying institutions, at a time when many are already feeling the strain.</em></p><p>Banks that escaped classification as G-SIFIs in 2011 may have breathed a sigh of relief at the time, but for many, that relief will have been short-lived. In October last year, the Basel Committee on Banking Supervision (BCBS) <a href="http://www.bis.org/publ/bcbs233.pdf" target="_blank">set out its proposed framework</a> for an additional category of systemically important financial institutions, so-called D-SIBs, or domestic systemically important banks.</p><p>D-SIBs are described by BCBS as “<em>banks that are not significant from an international perspective, but nevertheless could have an important impact on their domestic financial system and economy compared to non-systemic institutions</em>.” (Source: <a href="http://www.bis.org/publ/bcbs233.pdf" target="_blank">BCBS: A framework for dealing with domestic systemically important banks</a>, October 2012). </p><p><strong>A framework based on 12 principles</strong></p><p>The BCBS believes that banks that are too big or too important to fail on a national level should be subject to more stringent regulation – particularly in the allocation of capital buffers, but also in the overall quality of governance and risk management – than peers whose failure would have no systemic impact. To this end, it has set out 12 principles that national regulators need to incorporate into a framework for identifying and supervising qualifying banks operating in their jurisdiction; a framework that must be in place by January 2016.</p><p>Once identified by their home or host authorities, D-SIBs will be subject to similar capital restrictions to their global counterparts, notably the application of a Higher Loss Absorbency (HLA); an additional capital buffer to those mandated under Basel III. </p><p>The aim of the legislation is to prevent significant harm to a real national economy caused by the ‘failure or impairment’ of one or more institutions that are systemically important within the domestic economy, whether through their size, their interconnectedness with other institutions, their uniqueness in terms of the service they provide, or their organisational complexity. </p><p><strong>D-SIBs will see their data management burden become heavier still</strong></p><p>It’s not yet clear how regulators will go about identifying which banks will qualify as D-SIBs. But one thing is clear: for banks that do qualify (and the list will be reviewed on an annual basis), the new regulatory framework will impose yet another data aggregation and reporting requirement on top an already-onerous compliance workload.</p><p>Essentially, D-SIBs will have to demonstrate that they have calculated HLA requirements accurately, and that their governance and risk management activities meet the elevated standards set out in the 12 principles.</p><p><strong>Deloitte analyses the likely impact on data governance methods</strong></p><p>The impact of this disclosure requirement has been examined in detail by Deloitte in its report <a href="http://www.deloitte.com/view/en_GB/uk/industries/financial-services/6e9890d93552a310VgnVCM2000003356f70aRCRD.htm" target="_blank">Risk, data and the supervisor</a> (October 2012). Deloitte’s report is mainly concerned with G-SIBs, but it seems likely that most of the reporting requirements imposed on G-SIBs will also be imposed on D-SIBs.</p><p>Fundamentally, Deloitte notes that the introduction of G-SIBS (and, we can infer, now D-SIBs too), means that data quality and data governance are coming under increased regulatory scrutiny: “T<em>he eye of the supervisory community is moving on to data management and away from simply prescribing the data outputs,</em>” it warns.</p><p>Elsewhere, the report notes that “<em>implicit in the BCBS’ principles</em> [for G-SIBs] <em>is that underlying data which enables the generation of risk metrics must also be of sufficient quality…this includes counterparty data, legal entity hierarchies, book data, trade data, prices, instrument static, etc</em>.”</p><p><strong>Time for a more strategic approach to data management</strong></p><p>The conclusion is that banks urgently need to take a more strategic approach to data management, with an emphasis on watertight data governance that spans the entire business and means that any calculation or data point can be validated, reconciled and traced to its source.</p><p>That’s not something that can be achieved with ad-hoc projects or manual data gathering processes. It requires an automated, end-to-end, enterprise data governance framework that can be used to gather, calculate, validate and audit data of all kinds, and to turn that data into appropriate reports for all kinds of regulatory disclosure, from D-SIB reporting to Basel III and MiFID, as well as for internal risk analytics and management.</p><p><strong>For more about SecondFloor’s solution for efficient analytics and critical and regulatory reporting, and how it can help with the growing burden of data governance, risk analytics and regulatory disclosure, <a href="http://info.secondfloor.com/ContactUs.html" target="_blank">contact SecondFloor today</a>.</strong></p><p></p></div>
Climate-Changing Regulatory Standards Challenge Banking Industry
https://globalriskcommunity.com/profiles/blogs/climate-changing-regulatory-standards-challenge-banking-industr-1
2013-08-16T21:25:07.000Z
2013-08-16T21:25:07.000Z
Tyler Kelch
https://globalriskcommunity.com/members/TylerKelch
<div><p>Today’s banking industry must deal with an evolving regulatory landscape by developing new and innovative strategies for acquiring and optimizing capital. Banks must find a new way to raise capital, maintain a functional capital structure, and continue providing the products and services their customers demand while staying profitable. The new deadline for implementing the Basel III capital requirements makes capital management the most important issue for banks today.</p><p>Bogie Ozdemir, Vice President, Risk Models and Governance, Sun Life Financial recently spoke with the Global Financial Markets Intelligence (GFMI) about key topics to be discussed at the upcoming <a href="http://www.global-fmi.com/CASS2013_BO">GFMI 2nd Annual Capital Adequacy, Strategy And Stress Testing Conference</a>, September 30–October 2, 2013, in New York.</p><p><b>What are the key implications of Basel III for capital adequacy and capital optimization?</b></p><p><b>Bogie Ozdemir:</b> Basel III amounts to a climate change in the banking industry. It increased the capital requirements significantly — especially for certain businesses (most notably capital markets) and decreased the acceptable forms of capital. Capital has become a scarce resource under Basel III, putting significant downward pressure on ROE. In this new environment, Banks will need to change their business mixes, exit or shrink capital-heavy businesses, and adjust their operating models, while meeting income targets. During this course correction, their ROE and Income Targets will be challenged further as some rebalancing of operating models may compromise short-term income to improve ROE in future years. Subject to more onerous capital requirements under Basel III, banks will need to increase the efficiency of capital utilization and place greater emphasis on optimizing capital allocation and business mix across their operations.</p><p><b>How could banks integrate their regulatory and economic capital?</b></p><p><b>Bogie Ozdemir:</b> Regulatory capital is a fact of life and cannot be ignored. The economic view of capital also must not be ignored, as most recently seen in the J.P. Morgan case where attempt to reduce RWA consumption resulted in massive increase in economic risk and, ultimately, losses. On the insurance side, products such as variable annuities emphasize the importance of understanding economic risks that may not have been covered by regulatory capital requirements. The first order of business is to control the regulatory capital, which becomes the binding constraint for certain business. But regulatory capital and economic capital must be co-managed. I have noticed some banks using more simplistic — but not very robust — ways of managing the two, such a creating a composite metric that is a mix of economic and regulatory capital. Banks should establish a more robust optimization framework, define an objective function (such as maximizing ROE), and define explicit relationships between regulatory, economic (and its stressed version), and available capital. This framework should be a part of their capital and strategic planning process.</p><p><b>What are the best sources of funding in this scarce capital environment?</b></p><p><b>Bogie Ozdemir:</b> Contingent capital is becoming a viable source of funding undergoing concern. Junior Debt would be a source of capital under the “gone-concern” to protect deposit holders (and perhaps senior debt holders). By more carefully managing capital through ongoing and gone concern bases through an Economic Capital Framework, financial institutions can be more precise as to their required capital mix across common equity, senior debt, junior debt and hybrid instruments, and therefore minimize the average cost of capital.</p><p><b>How could you make sure stress testing results are integrated in capital strategy?</b></p><p><b>Bogie Ozdemir:</b> We know from the last crisis that EC can increase significantly under stress — particularly when taking into account stressed inter and intra risk correlations. In their ICAAP/ORSA exercises, FIs define an explicit risk appetite under stress (minimum acceptable rating and capital adequacy) and ensure that they remain consistent with that risk appetite under a series of forward-looking conditional stress scenarios. As part of the Use Test under ICAAP and ORSA, FIs should demonstrate how the results of their stress testing and capital projection exercises have been incorporated into business planning decisions. In particular, the results of stress testing are used directly to inform the appropriateness of an FI’s capital buffer above its internal targets and whether the integrity of its capital structure is sufficient in stressed conditions. Degrees of vulnerability to stress must also be considered as part of capital optimization strategies.</p><p><i>Bogie Ozdemir is Vice President of Sun Life Financial Group, responsible for Enterprise Economic Capital, Operational Risk, Model Vetting & Risk Analytics, Risk Policy, and Economic Scenario Generation groups. He was a Vice President of the BMO Financial Group responsible for Economic Capital, Stress Testing, and Basel Analytics and jointly responsible for ICAAP. Previously, he was a Vice President of Standard & Poor’s Risk Solutions group, where he was globally responsible for engineering new products and solutions, business development and management. He is the coauthor of a book titled “Basel II Implementation: A Guide to Developing and Validating a Compliant, Internal Risk Rating System.”</i></p><p>The <b>GFMI</b> <b>2<sup>nd</sup> Annual Capital Adequacy, Strategy and Stress Testing Conference</b> will take place in New York, September 30–October 2, 2013. For more information, visit the <a href="http://www.global-fmi.com/CASS2013_BO">event website</a>.</p><p>For more information, please contact Michele Westergaard, Senior Marketing Manager, Media & PR, GFMI at 312-894-6377 or <a href="mailto:Michele@global-fmi.com">Michele@global-fmi.com</a>.</p><p><b>About Global Financial Markets Intelligence</b></p><p><i>GFMI is a specialized provider of content-led conferences for the financial markets. Carefully researched with leading financial market experts, our focused quality events deliver key bottom-line value through targeted presentations, interactive discussions and high-level networking opportunities. </i></p></div>
Stress Testing Framework
https://globalriskcommunity.com/profiles/blogs/stress-testing-framework
2013-03-16T11:15:49.000Z
2013-03-16T11:15:49.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Properly stress testing measures of risk is a complicated activity that few companies have done well. In this blog we take a look at a complete framework for stress testing.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">The spreadsheet map can be downloaded from this [<span style="color:#0000ff;"><a href="http://causalcapital.blogspot.com/2013/03/stress-testing-framework.html" target="_blank"><span style="color:#0000ff;">LNK</span></a></span>]</span></p><p></p><p></p><p></p></div>
What is scenario analysis to op risk people?
https://globalriskcommunity.com/profiles/blogs/what-is-scenario-analysis-to-op-risk-people
2013-02-09T09:05:24.000Z
2013-02-09T09:05:24.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Over the last few days, several people have discussed various scenario analysis techniques with me and going on general opinion, this risk assessment technique is very popular among operational risk analysts. Definitely no doubt there, but what scenario analysis means to one analyst, can often be something entirely different to another.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">What does scenario analysis really mean to operational risk analysts?</span></p><p><span style="color:#0000ff;font-family:arial, helvetica, sans-serif;" class="font-size-2"><a href="http://causalcapital.blogspot.sg/2013/02/what-is-scenario-analysis-to-op-risk.html" target="_blank"><span style="color:#0000ff;">Click here to continue reading</span></a></span></p><p></p></div>
10 Basel II operational risk successes and failures
https://globalriskcommunity.com/profiles/blogs/10-basel-ii-operational-risk-successes-and-failures
2013-02-02T04:30:00.000Z
2013-02-02T04:30:00.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">The ten success stories of Basel II are not unique in anyway and there are plenty of other aspects to the Basel II initiative that supported an improved risk function in banks. None the less, these ten risk framework efforts seem to keep appearing as common "this is an excellent element to our risk framework and has evolved our risk management practice in the bank".</span></p><p><span style="color:#0000ff;font-family:arial, helvetica, sans-serif;" class="font-size-2"><a href="http://goo.gl/AtRpC" target="_blank"><span style="color:#0000ff;">Click here to see the top 10 successes and failures</span></a></span></p></div>
ISO 31000 supporting Basel II
https://globalriskcommunity.com/profiles/blogs/iso-31000-supporting-basel-ii
2013-01-13T02:41:25.000Z
2013-01-13T02:41:25.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">On the G31000 LinkedIn risk forum, we have decided to open up a new "chat room" that is dedicated to the application of the ISO 31000 enterprise risk management standard to Banking, Insurance, Supply Chain Finance, Markets and Investment.</span></p><div class="separator"><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">The link for the new group can be found by clicking the [<span style="color:#0000ff;"><a href="http://www.linkedin.com/groups?gid=4790373&trk=myg_ugrp_ovr" target="_blank"><span style="color:#0000ff;">Link here</span></a></span>].</span></div><div><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><br />In this blog posting however, we are going to consider whether ISO 31000 is compatible with Basel II from the outset, [<span style="color:#0000ff;"><a href="http://causalcapital.blogspot.sg/2013/01/iso-31000-supporting-basel-ii.html" target="_blank"><span style="color:#0000ff;">Link here</span></a></span>].</span></div></div>
Addressing Procyclicality
https://globalriskcommunity.com/profiles/blogs/addressing-procyclicality
2012-12-20T10:31:43.000Z
2012-12-20T10:31:43.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Really good paper on procyclicality and the problems with Basel III countercycle buffers</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Perhaps one of the biggest issues facing banks with Basel III is how to address Procyclicality, especially if the bank is not running an Advanced IRB credit risk framework. Actually, just obtaining information about the different accepted practices on how to measure Procyclicality within a lending portfolio isn't so easy.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Just the other day however, I was pointed in the direction of a really good summary and publication on Procyclicality and I wanted to share this link here on the Causal Capital blog [<span style="color:#3366ff;"><a href="http://causalcapital.blogspot.com/2012/12/addressing-procyclicality.html" target="_blank"><span style="color:#3366ff;">LINK</span></a></span>]</span></p></div>
10 reasons why risk analysts should categorise risk
https://globalriskcommunity.com/profiles/blogs/10-reasons-why-risk-analysts-should-categorise-risk
2012-10-30T11:17:26.000Z
2012-10-30T11:17:26.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">I am a big believer in the categorisation of risk events and while this may not be popular among many of the non-banking members of the risk community, even more so with ISO 31000 practitioners, I still believe it is an important exercise to carryout.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Either way; I have taken to list ten reasons why causal event categorisation is crucial for the operation of a sound enterprise risk management framework.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">The top ten can be found at this <span style="color:#0000ff;"><a href="http://causalcapital.blogspot.sg/2012/10/importance-of-risk-categories.html" target="_blank"><span style="color:#0000ff;">LINK</span></a></span></span></p></div>
The Risk Clock
https://globalriskcommunity.com/profiles/blogs/the-risk-clock
2012-10-23T11:29:30.000Z
2012-10-23T11:29:30.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Some risks are cyclical in nature which can be modeled on a risk clock.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><a href="http://causalcapital.blogspot.sg/2012/10/the-risk-clock.html" target="_blank"><img src="{{#staticFileLink}}8028220889,original{{/staticFileLink}}" width="303" class="align-center" alt="8028220889?profile=original" /></a></span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">In this blog we build up a risk clock and look at why businesses are not good at forecasting cyclical risk events.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><a href="http://causalcapital.blogspot.sg/2012/10/the-risk-clock.html" target="_blank">Click here to continue reading</a></span></p></div>
The Importance of Economic Capital in the New Regulatory Environment
https://globalriskcommunity.com/profiles/blogs/the-importance-of-economic-capital-in-the-new-regulatory
2012-08-20T15:54:32.000Z
2012-08-20T15:54:32.000Z
Michele Westergaard
https://globalriskcommunity.com/members/MicheleWestergaard
<div><p>The Dodd-Frank Act and Basel III are going to change the way banks raise, allocate and manage capital. Banks need to prepare for these changes now and develop effective strategies for achieving capital optimization and sustainable return on equity. The <a href="http://www.mefinance.com/CAS_InterviewCL"><b>GFMI, a marcus evans, Capital Adequacy and Strategy Conference, September 12-14, 2012 in New York, NY</b></a>, will help banks to understand what the legislation means for capital adequacy, as well as what they need to do to achieve the optimum level of capital to ensure continuous profitability.</p><p>Not only do US banks have to understand the Basel compliance rules, but they also need to understand how this relates to the Dodd Frank compliance act and how these two regulations work together to build a capital strategy.</p><p>Clifton Loo answered a series of questions written by GFMI before the forthcoming <b>Capital Adequacy and Strategy Conference</b>. <i>All</i> <i>responses represent the view of Mr. Loo and not necessarily those of SunTrust Bank.</i></p><p><b>What do you think of the latest additions/clarifications to the Basel III requirements?</b></p><p>Overall the requirements are consistent with both the CCAR process and also the Dodd Frank Act. Although we agree in concept with the majority of the information, some of the requirements seem to have erred on the overly cautious side causing banks to be at conflict with their basic process of lending. Other items appear to need more thought like the change in the reps and warranties. </p><p><b>How do the regulations really affect capital adequacy on a daily basis?</b></p><p>Risk weights have gone up and there are less capital instruments that can be used to meet our capital requirements and ratios. In addition, depending on how you interpret the rules, some of the buffers may not actually be buffers because of the Prompt Corrective Action that is attached to failing to meet the requirements.</p><p><b>How important is economic capital (EC) at the moment?</b></p><p>EC is still important for risk adjusted pricing, portfolio mix management and risk tolerance/limit setting. However, EC is not important from a capital adequacy or regulatory perspective. Regulators have almost no focus on EC, but there are rumours this will change.</p><p><b>What are the ways (if any) to minimize regulatory capital?</b></p><p>This is a hard question because to minimize regulatory capital, you have to change your product mix as regulatory capital calculations are based on products. This change in product mix may make the bank less profitable or unprofitable. Banks may need to rethink how to measure profitable return from a regulatory perspective.</p><p><b>What do you feel attendees will gain from attending this conference?</b></p><p>I think the regulatory environment has become restrictive and this conference is a forum to discuss how businesses are reacting to the new regulatory environment to keep their businesses profitable. Also, the conference may be a good forum to rethink how EC and regulatory capital are used in the risk adjusted decision making process.</p><p><i>Clifton Loo, PhD currently serves as the Head of Economic Capital at SunTrust Banks. In this capacity, he leads the effort to calculate economic capital along with assisting in the bank-wide calculation of risk adjusted return on capital. In addition, his team builds the econometric models for the CCAR process. In previous positions, he has worked as Portfolio Risk Manager and Operational Risk Manger in SunTrust Robinson Humphrey and also a Model Validation Manager at SunTrust.</i></p><p>For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, GFMI at 312-540-3000 ext. 6625 or <a href="mailto:Michelew@marcusevansch.com">Michelew@marcusevansch.com</a>.</p></div>
Why Banks Fail Stress Tests
https://globalriskcommunity.com/profiles/blogs/why-banks-fail-stress-tests
2012-06-18T11:00:00.000Z
2012-06-18T11:00:00.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;">Earlier on this year, the Bank for International Settlements released a paper which stated directly: "<em><span style="color:#ff0000;">No macro stress test carried out ahead of the crisis identified the build-up of vulnerabilities</span></em>"</span></p><p><span style="font-family:arial, helvetica, sans-serif;">This is a very harsh reality and highlights one of the key areas risk management needs to address. In this article we look at why stress testing risk systems hasn't been working for the banking sector.</span></p><p><span style="color:#3366ff;font-family:arial, helvetica, sans-serif;"><a href="http://causalcapital.blogspot.sg/2012/06/why-banks-fail-stress-tests.html" target="_blank"><font face="arial, helvetica, sans-serif"><span style="color:#3366ff;">Click here to continue reading</span></font></a></span></p></div>
Will you meet the new Basel III requirements?
https://globalriskcommunity.com/profiles/blogs/will-you-meet-the-new-basel-iii-requirements
2012-06-12T08:53:06.000Z
2012-06-12T08:53:06.000Z
Stacey Kelly
https://globalriskcommunity.com/members/StaceyKelly
<div><p><font size="2" face="Arial, Helvetica, sans-serif">Fitch’s publication made the news in the <em>Financial Times</em> recently. An extra $566bn has been announced as the figure big banks will need to meet the tougher <strong>Basel III bank capital standards.<br /></strong>But how will financial institutions meet these steep capital requirements? Find out at <em>Euromoney’s</em> <a href="http://www.euromoneyseminars.com/EventDetails/0/4767/Basel-III-Resolution.html?CategoryID=0&EventID=4767" target="_blank"><font color="#0000FF"><strong>Basel III: The Resolution Conference</strong></font></a>.</font></p><p><font size="2" face="Arial, Helvetica, sans-serif">Hear from commercial giants including <strong>Lloyds Banking Group</strong>, <strong>Rabobank</strong>, <strong>Commerzbank</strong> and <strong>Unicredit</strong> on their strategies for optimising capital in light of the <strong>Basel III guidelines</strong>. Points to be discussed on the panel include:</font></p><ul><li><font size="2" face="Arial, Helvetica, sans-serif">Managing the <strong>transition of old style capital instruments</strong> to new style capital instruments</font></li><li><font size="2" face="Arial, Helvetica, sans-serif">Role of <strong>non-dilutive capital instruments</strong> (i.e. Additional Tier 1 and Tier 2) for banks</font></li><li><font size="2" face="Arial, Helvetica, sans-serif">How much <strong>common equity</strong> is needed in a bank's capital structure...?</font></li></ul><p><font size="2" face="Arial, Helvetica, sans-serif">...And much more. <a href="http://www.euromoneyseminars.com/EventDetails/0/4767/Basel-III-Resolution.html?CategoryID=0&EventID=4767" target="_blank"><font color="#0000FF">Visit the website here</font></a> for full agenda details.</font></p><p><font size="2" face="Arial, Helvetica, sans-serif">On the other side of the table, key investors including <strong>Georg Grodzki</strong>, Head of Pan-European Credit Research, <strong>L&G Investment Management</strong>, <strong>Alexandre Martin-Min</strong>, Head of Structured Credit Investment, <strong>Axa Investment Managers</strong> and <strong>Andrew Robertson</strong>, Head of Trading, <strong>Christofferson Robb & Company</strong> will discuss their perspectives on the resilience of bank assets in their portfolios.</font></p><p><font size="2" face="Arial, Helvetica, sans-serif">Completing the picture, leading structuring banks will discuss <strong>‘Developing new generation capital instruments’</strong> offering solutions to the capital raising conundrum.</font></p><p><font size="2" face="Arial, Helvetica, sans-serif">Don’t miss your chance to hear from the experts and guide your business through these regulatory uncertainties. <a href="http://www.euromoneyseminars.com/EventRegister.aspx?CategoryID=0&EventID=4767" target="_blank"><font color="#0000FF"><strong>Register today to secure your place</strong></font></a>.</font></p><p><font size="2" face="Arial, Helvetica, sans-serif"><strong>To register simply:</strong></font></p><ol><li><a href="http://www.euromoneyseminars.com/EventRegister.aspx?CategoryID=0&EventID=4767" target="_blank"><font color="#0000FF" size="2" face="Arial, Helvetica, sans-serif">Visit the website</font></a></li><li><font size="2" face="Arial, Helvetica, sans-serif">Call the hotline on (<strong>UK) +44 (0)20 7779 7222</strong> or</font></li><li><font size="2" face="Arial, Helvetica, sans-serif">Email Stacey Kelly at</font> <a href="mailto:s_kelly@euromoneyplc.com" target="_blank"><font size="2" face="Arial, Helvetica, sans-serif">s_kelly@euromoneyplc.com</font></a><font size="2" face="Arial, Helvetica, sans-serif"> </font></li></ol><p><font size="2" face="Arial, Helvetica, sans-serif">We look forward to seeing you in London next week.</font></p></div>
Are banks ready for Counterparty Credit Risk under Basel III?
https://globalriskcommunity.com/profiles/blogs/are-banks-ready-for-counterparty-credit-risk-under-basel-iii
2012-06-08T13:55:48.000Z
2012-06-08T13:55:48.000Z
Ammar Akhtar
https://globalriskcommunity.com/members/AmmarAkhtar
<div><p>Maturity across the Counterparty Credit Risk (CCR) and Credit Valuation Adjustments (CVA) space varies greatly across the industry. Our recent survey provided some interesting insights as to whether banks are ready for CCR and CVA under Basel III, thanks to detailed responses from our clients and academic participants.</p><p> </p><p>We found that there are clear differences of opinion between academics and practitioners particularly when it comes to Basel III readiness for CCR. The same is reflected with regards to banks having access to the right people and the right technology to effectively calculate and manage CVA.</p><p> </p><p>However, from our survey responses, most banks themselves feel they do have access to the right people and talent but struggle with technology requirements, particularly with access to data. This is very much the crux of the issue facing the industry - CCR is a hybrid product and modelling it accurately requires several data sets which have not historically been combined for use regularly. Over 70% of the survey participants are now reviewing their credit support annex (CSA) and collateral agreement data in a bid to prepare for Basel III. Speaking from personal insight, further challenges will likely arise due to restrictions created by legacy systems, organisational alignment and computing power required.</p><p> </p><p>Added sophistication, be it of process, technology or people, will come at a price, and there is a trade-off to be made between precision and cost of the overall architecture. This balance must be struck for the risk managers, quants and technologists who will use it and will be vastly different for each organisation.</p><p> </p><p>Indeed, while most of the big names are well on their way to building their CCR management systems, several smaller banks are still trying to understand how far they need to go to be ready.</p><p> </p><p>Clearly the stakes are high. They are further compounded by uncertainty around regulatory timelines, the extent to which the OTC market can move to a central clearing model and the capital charges and P&L volatility which CCR brings. Banks certainly need to start preparing now so they are not caught out further down the line. </p><p> </p></div>
Concentration Risk
https://globalriskcommunity.com/profiles/blogs/concentration-risk
2012-05-28T15:39:33.000Z
2012-05-28T15:39:33.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Concentration risk is the "spread" of outstanding obligors or specifically the level of diversity that exists across a bank's loan portfolios. The lower the diversity, the higher the credit concentration risk.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">In this blog post we look at the stress testing aspects around concentration risk and a presentation has also been attached to this journal which can be downloaded.</span></p><p><span style="color:#0000ff;"><a href="http://causalcapital.blogspot.com/2012/05/concentration-risk.html" target="_blank"><font face="arial, helvetica, sans-serif"><span style="color:#0000ff;">Click here to continue reading</span></font></a></span></p></div>
14 techniques for modelling Loss Data
https://globalriskcommunity.com/profiles/blogs/14-techniques-for-modelling-loss-data
2012-05-24T06:12:16.000Z
2012-05-24T06:12:16.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">In general only a handful of businesses correctly capture Operational Risk Loss Data and of those that do, only a small number of risk units in these firms are modelling their risk data in a coherent manner. After a bit of research on the internet and in various other channels, it has become relatively apparent that there isn't a comprehensive list of potential models which can be uses for understanding Operational Risk. I would have expected an analyst somewhere at some point in time to have done this and published it. None the less, this post achieves that goal.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><span style="color:#ff0000;"><a href="http://causalcapital.blogspot.com/2012/05/modelling-loss-data.html" target="_blank"><span style="color:#ff0000;">Follow this link</span></a></span> to grab the presentation on 14 techniques for modelling loss data.</span></p></div>
ISO 31000 for banks
https://globalriskcommunity.com/profiles/blogs/iso-31000-for-banks
2012-05-17T15:30:00.000Z
2012-05-17T15:30:00.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">A presentation on ISO 31000 for banks.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">A presentation that looks at ISO 31000 in the banking domain. Why ISO 31000 is compatible with Basel, why ISO 31000 can value-add a Basel risk framework.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><font face="arial, helvetica, sans-serif">The presentation attached to this [ <span style="color:#ff0000;"><a href="http://causalcapital.blogspot.com/2012/05/iso-31000-for-banks.html" target="_blank"><span style="color:#ff0000;">link</span></a></span> ] will be delivered at the ISO 31000 conference in Paris on 21st and 22nd of May 2012.</font></span></p></div>
The Impact of CSAs for Counterparty Risk and CVA
https://globalriskcommunity.com/profiles/blogs/the-impact-of-csas-for-counterparty-risk-and-cva
2012-05-10T09:00:00.000Z
2012-05-10T09:00:00.000Z
Michele Westergaard
https://globalriskcommunity.com/members/MicheleWestergaard
<div><p>Managing a profitable balance sheet is more challenging than ever. With Basel III and the more immediate Dodd-Frank regulation on the horizon, a tool such as FTP is vital to ensure an effective centrally managed liquidity strategy. Post-crisis, whilst the economic situation is improving, allocating sufficient liquidity costs quickly and efficiently to the correct business-line is paramount.</p><p>Karin Bergeron is a trader on the CVA desk at Scotiabank. She is responsible for pricing and hedging CVA as well as providing direction on policy, technology and modeling initiatives that impact her business. Karin has been with the Global Banking and Markets division of Scotiabank for 9 years, and involved with CVA for the last 5. <i>marcus evans had the privilege to speak to Karin in an exclusive interview below.</i></p><p><b>CVA is one of the biggest talking points in the financial sector nowadays. Is this just due to regulatory impetus or is there real competitive advantage to be gained from this?</b></p><p><b>KB:</b> CVA is not just a regulatory mechanism; if managed correctly, CVA can help a firm assess and manage its risks appropriately.</p><p><b>When it comes to the valuation of derivatives, how important is the selection of the appropriate discounting methodology and do discrepancies between institutions matter?</b></p><p><b>KB:</b> This can be very important, as it may materially change derivatives pricing. Institutions that are not properly valuing their trades can miss opportunities to put on beneficial trades as well potentially putting on unprofitable trades. It becomes difficult to look to a market for pricing as the discounting methodology for two identical trades can differ due to counterparty and portfolio considerations.</p><p>The one other thing to note in this instance, however, is that the push to centralized counterparties and standardized CSAs will help alleviate discrepancies in the discounting methodology required for collateralized positions, so it will really be the proper development of accurate discounting methodologies for uncollateralized trades that will make the bigger difference in the future.</p><p><b>In recent years awareness seems to have increased of the importance of collateral when it comes to the valuation of a derivative – for instance, discussion around CSA discounting and closeouts is becoming far more common at the cutting edge institutions. Do you think that this is something that is fully understood and how important do you think it is to better comprehend it?</b></p><p><b>KB:</b> I think it is generally quite well understood, but really “correctly” taking all the details into account is actually quite difficult, and for practicality many institutions choose to take a more simplistic approach. What is always important when making such approximations is to understand when making them can hurt you and have a way to prevent taking losses despite the necessary simplifications.</p><p>Karin Bergeron will be a speaker at the marcus evans before the forthcoming <a href="http://www.marcusevansch.com/KBInterview" target="_blank">CVA Funding and Valuation for Derivatives Conference</a>, May 17-18, 2012 in New York City, NY.</p><p>For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, marcus evans at 312-540-3000 ext. 6625 or <a href="mailto:Michelew@marcusevansch.com">Michelew@marcusevansch.com</a>.</p><p><b>About marcus evans</b></p><p><i>marcus evans conferences annually produce over 2,000 high quality events designed to provide key strategic business information, best practice and networking opportunities for senior industry decision-makers. Our global reach is utilized to attract over 30,000 speakers annually, ensuring niche focused subject matter presented directly by practitioners and a diversity of information to assist our clients in adopting best practice in all business disciplines.</i></p></div>
The UK is out on Basel III
https://globalriskcommunity.com/profiles/blogs/the-uk-is-out-of-basel-iii
2012-05-07T02:30:00.000Z
2012-05-07T02:30:00.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><span>The Chancellor George Osborne</span> has warned the European Union that Britain will refuse to sign up to "idiotic" proposals under Basel III.</span></p><blockquote class="tr_bq"><span style="font-family:arial, helvetica, sans-serif;color:#808080;" class="font-size-2">George Osborne has warned the European Union that Britain will refuse to sign up to "idiotic" proposals that would water down tough international rules on bank capital. </span></blockquote><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">This is a very concerning development and quite astounding actually. Let's ponder on the drop out of the UK from Basel III, just as a idea for a moment: [<span style="color:#3366ff;"><a href="http://quantogate.blogspot.com/2012/05/osborne-basel-divide.html" target="_blank"><span style="color:#3366ff;">click here to continue reading</span></a></span>]</span></p></div>
Breaking down the risk silo
https://globalriskcommunity.com/profiles/blogs/breaking-down-the-risk-silo
2012-04-29T09:30:00.000Z
2012-04-29T09:30:00.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><div><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">I often hear from many risk analysts that we need to break down the risk silo and stop measuring risk in unique disciplines. But such a statement without thinking begs the question: If the silo is so evil, why did we invent the structure in the first place?</span></div><div><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><br /></span></div><div><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">In this quick posting we look at risk silos, why they exist, the problems with them and how to make them work.</span></div><div><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"><br /></span></div><div><span style="color:#0000ff;font-family:arial, helvetica, sans-serif;" class="font-size-2"><a href="http://causalcapital.blogspot.com/2012/04/breaking-down-silo.html" target="_blank"><span style="color:#0000ff;">Click here to continue reading</span></a></span></div></div>
Banks capital reserve practices
https://globalriskcommunity.com/profiles/blogs/banks-capital-reserve-practices
2012-04-11T09:26:29.000Z
2012-04-11T09:26:29.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">The European Banking Authority released a statement indicating that gaps exist in the capital standards for about 20% of the regions top 48 largest banks. Meanwhile, the Bank for International Settlements has posted a relatively positive report on Asian banks loan reserve practices.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Are Asian banks in front of the game for capital management than their European counterparts?</span></p><p><span style="font-family:arial, helvetica, sans-serif;color:#3366ff;" class="font-size-2"><a href="http://quantogate.blogspot.com/2012/04/disparity-in-banks-capital-reserve.html" target="_blank"><span style="color:#3366ff;">Click to continue reading</span></a></span></p></div>
What is wrong with VaR
https://globalriskcommunity.com/profiles/blogs/what-is-wrong-with-var
2012-03-30T09:30:00.000Z
2012-03-30T09:30:00.000Z
Martin Davies
https://globalriskcommunity.com/members/MartinDavies92
<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Value at Risk (VaR) is often criticised. This is especially the case from those who don't use it, no surprise there and I label such propaganda as statistical xenophobia by the masses.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">In this post we look at the problems with VaR and what can be done to improve this measure of potential downside.</span></p><p><span style="font-family:arial, helvetica, sans-serif;"><span style="color:#ff0000;font-family:arial, helvetica, sans-serif;" class="font-size-2"><a href="http://causalcapital.blogspot.com/2012/03/what-is-wrong-with-var.html" target="_blank"><span style="color:#ff0000;">Click here to continue reading</span></a></span><br /></span></p></div>