Modeling Sovereign Risk. Part 2: Quantification
“The Bloomberg sovereign risk model starts by dividing countries into two types,” said Rajan Singenellore, “reserve-currency countries and non-reserve currency countries. Everything else depends on that distinction.” Singenellore is Product Manager, Risk & Valuations at Bloomberg and was the second of two speakers to address a GARP webinar audience on September 12, 2013. A reserve-currency country is one whose currency is held in significant quantities by other governments as part of their foreign exchange reserves, such as the US and the Japan. There is a pressing need for quantification in the area of sovereign credit risk, he said, citing as […]
Modeling Sovereign Risk. Part 1: Emerging Markets
“Country-specific factors such as government debt and the sovereign credit rating change slowly but global aggregates such as the risk appetite change quickly, thus leading to confusion the part of observers,” said Michael Rosenberg, Foreign Exchange Consultant, Bloomberg and author of Currency Forecasting: A Guide to Fundamental and Technical Models of Exchange Rate Determination. He was the first of two speakers to address a GARP webinar audience on September 12, 2013. Much of Rosenberg’s talk focused on the sovereign credit risk of emerging markets (EM), because the accelerating flow of net private capital into EM from 1980-2014 has been unprecedented. […]
Basel III and Beyond: Part 2. Real-Time Counterparty Risk
“Implementing the CVA is a journey with great expectations,” said James Zante, Product Manager for Integrated Market and Credit Risk at IBM Risk Analytics. He was the second of two speakers on the topic of counterparty risk assessment. He presented a real-life case to a GARP webinar audience on June 27, 2013. CVA refers to a new capital charge, the credit valuation adjustment brought in as part of the Basel III regulations. The CVA plays an important role in the optimization of credit capital, said Zante. At one extreme, the trades cleared through the clearinghouse may be considered “risk free,” […]
Basel III and Beyond: Part 1. Optimization with On-Demand Risk Insights
“The capital consumption of credit counterparty risk has become an issue for banks,” said Rita Gnutti, Head of Internal Model Market and Counterparty Risk at Intesa Sanpaolo. She was the first of two speakers addressing the impact of regulatory developments on counterparty risk assessment. She spoke to a webinar audience arranged by the Global Association of Risk Professionals on June 27, 2013. Gnutti first outlined the new Basel III regulatory framework of credit counterparty risk (CCR), then she described its calculation using internal model methodology (IMM), and third she described the computing and back-testing of CCR carried out by her […]
Risk Models From Governance to Validation: Part 2. A Model of Model Management
No longer should a firm just use financial models; it should have a “model of model management,” said Donna Howe, Chief Risk Officer at Sovereign Bank. She was the second of three speakers at a June 11, 2013 webinar on risk models organized by the Global Association of Risk Professionals (GARP). Such a “meta-model” would help a firm sort and track models. Howe said that risk models must be understood within the wider frame of compliance and other non-prudential risk. Model parsimony, or Occam’s razor, that was recommended by the first speaker, is good but in the real world “cannot […]
Risk Intelligence for Value Creation: Part 2. The New Efficient Frontier
“Risk intelligence is the new efficient frontier,” said Philippe Carrel, author of The Handbook of Risk Management: Implementing a Post-Crisis Corporate Culture (2010) [Cover shown]. He was the second of two speakers on May 28, 2013 at a webinar organized by the Global Association of Risk Professionals (GARP). He went on to explain the connection between risk-adjusted performance and the elaborate information network that is “risk intelligence.” “Balancing shareholder’s value with risk exposure depends on a firm’s assessment of its aggregate sensitivity to risk and its ability to act on it,” Carrel said. “A firm builds its corporate memory as […]
How New Regulations Are Breaking Down Silos. Part 3: Interconnection Needed
The biggest hurdle to breaking down silos “is organizational in nature,” according to Amit Gupta, Partner in Risk Management Practice at the consulting firm Accenture. “The heads of Risk, Finance, Operations are all different people and this introduces a level of complexity.” However, “organizational interconnection at high levels is starting to happen.” Gupta was the third panellist to weigh in at the GARP webinar on May 21, 2013 on how new financial regulations (Dodd-Frank and Basel III) are breaking down silos in risk management. Regulators are pushing for greater consistency in reporting. As an example, Gupta pointed to new requirements […]
How New Regulations Are Breaking Down Silos. Part 2: Look at Economics
An institution “needs to have a strong cross-risk function which coordinates all parties in order to influence the recovery plan,” said Dr. Andrea Burgtorf, Head of Stress Testing, Risk Analytics and Instruments at Deutsche Bank. She was speaking at the GARP webinar on May 21, 2013 about the effect of new regulations on risk management. As part of the Basel III mandate to develop a Recovery and Resolution Plan, a bank must include analysis of all critical economic functions, and this, said Burgtorf, “forces a bank to examine what are its core and non-core businesses, and to decide which governance […]
How New Regulations Are Breaking Down Silos. Part 1: Stress Testing
“Financial regulators have introduced stress testing as a means to cut across silos,” said Dan Travers, VP of Product Management, Adaptiv at SunGard and the opening speaker at a GARP webinar on May 21, 2013. Historically, he noted, financial risk has been treated as a set of separate units (or silos) across the main types of risk: credit, market, operational, and liquidity risk, the latter connected to asset-liability management (ALM). The new reporting demands of Basel III and Dodd-Frank serve to break down silos, Travers said, with such things as incremental risk charge being reported as capital percentage for the […]
Evolution of the OTC Swaps Markets. Part 2: Lessons Learned
The scramble to meet the Phase 1 deadline of new regulations on swaps “was a significant learning experience,” said Bis Chatterjee, Global Head of E-Trading, Credit Markets at Citi. He was the second speaker in a webinar panel organized by the Global Association of Risk Professionals (GARP) on May 14, 2013. The deadline that came into effect March 11, 2013 pertained to the Dodd-Frank Act governing over-the-counter (OTC) swaps. (Two more phases will follow; see Part 1 for details.) There were challenges first of all, Chatterjee said, in the self-identification of market participants in Phase 1. Second, even if you […]