“Lending Will Be Marketing Gimmick”
What will be the effect of Basel III on banks in emerging markets? “Commercial banks will become less interested in providing loans,” said Dr. Michael C. S. Wong, the first panellist in a webinar on Banking in Emerging Markets held November 20, 2014, and sponsored by the Global Association of Risk Professionals. He is Associate Professor of Finance at City University of Hong Kong, and Chairman at CTRISKS Rating. Wong summarized the challenges of the new Basel III regulatory regime, with its tougher capitalization and liquidity requirements. A global systemically important bank (G-SIB) will have additional capital and cash-holding requirements, he said, […]
Stressed Interest Rates: Battle of the Models
For generating shocked interest rate curves, such as a sudden economic stress might engender, “a three-factor parameterization solves many problems—but issues remain,” said Alexander Bogin, Senior Economist at the Federal Housing Finance Agency, and the second presenter at a webinar on modelling interest rate shocks held October 28, 2014, and sponsored by the Global Association of Risk Professionals. To develop an improved yield curve approximation, Bogin showed three variants of non-linear Laguerre functions of time to maturity. These were the Nelson-Siegel model (which has 3 factors); the Svensson model (4 factors); and the Björk-Christensen model (5 factors). Over a two-year […]
Stressed Interest Rates: ‘Simple’ Not Good Enough
“It’s difficult to apply historical down-shocks to the current low interest rate environment,” said Will Doerner, “and models have problems in the low interest rate environments of today.” Doerner is Senior Economist at the Federal Housing Finance Agency (“Agency”), and was the first presenter at a GARP webinar on how to generate historically-based interest rate shocks, which was held October 28, 2014. An accurate estimation of market risk helps financial institutions determine the amount of capital needed to withstand adverse market events. Interest rate changes represent a key factor for institutions with large fixed income portfolios. As such, when stress […]
Correlation Risk
“Before we argue about correlation, we must first agree on which interpretation we are talking about,” said Gunter Meissner, President of Derivatives Software, Founder and CEO of Cassandra Capital Management, and Adjunct Professor of Mathematical Finance at NYU-Courant. He was sole presenter at a webinar on October 21, 2014, sponsored by GARP. Meissner cited three different interpretations commonly used for correlation risk. “In trading practice, it can mean similar movement in time. Or it can be narrowly defined,” he said, “to only refer to the linear Pearson definition.” Third, it can be used in the broader sense of any type […]
Basel III Standardized: the Holistic Approach
“Banks need technology to help with Basel IIII compliance because moving from Basel I to Basel III is a quantum jump,” said Tom Kimner, Head of Americas Risk Practice at SAS Institute. He was the second of two panellists at a webinar held on September 16, 2014, organized by the Global Association of Risk Professionals to discuss the Basel III Standardized Approach for mid-tier banks. Kimner began by outlining five key issues to Basel III compliance: Data Structure and Validation – The data on credit exposures necessary for capital calculations needs to be cleaned and transformed. “An entire body of work […]
Basel III Standardized: Avoid the Showstopper
“If you can’t comply, it could be a showstopper,” said Henry Fields, Partner at Morrison & Foerster LLP, who was the first of two panellists at a webinar held on September 16, 2014, organized by the Global Association of Risk Professionals. The purpose of the webinar was to discuss the Basel III Standardized Approach for mid-tier banks (assets of over $500 million), and Fields began by giving an overview. The potential “showstopper” would be non-compliance with the new rules for risk weights for assets that are scheduled to come into effect January 1, 2015. “When the Fed issued the [new] […]
DFAST 2. Challenges of Modeling Credit Risk
There are multiple challenges to private firm commercial & industrial (C&I) risk management, according to Mehna Raissi, Director, Enterprise Risk Solutions at Moody’s Analytics. She was the second of two speakers at a GARP-sponsored webinar on September 9, 2014, to address the Dodd-Frank Act Stress Test (DFAST). Successful risk management depends on three things: the potential for error within standardized processes; ongoing monitoring of counterparty credit risk; and the efficacy of credit risk models. A very big challenge is data quality and availability. “What are the types of variables and factors needed?” Raissi asked. “How can we take into consideration […]
DFAST 1. Modeling Losses and Provisions Over Time
Although Dodd-Frank Act Stress Testing (DFAST) requirements may be the primary motivation for bringing stress testing to the forefront, they should not be the only reason a bank explores the components of loan loss forecasting under a stressed scenario, said Chris Henkel, Senior Director, Enterprise Risk Solutions at Moody’s Analytics. He was the first of two panelists at a webinar held on September 9, 2014, sponsored by the Global Association of Risk Professionals. An accurate forecast of charge-offs is crucial, Henkel said, so that a firm “can estimate what allowances should be and how large the provisions should be,” thereby […]
Tracking the Elusive Black Swan
Enterprise risk management (ERM) requires a “robust framework design and collaborative approach to capture a black swan event before its occurrence,” said Brenda Boultwood, Senior Vice President of Industry Solutions at MetricStream. She was the second of two speakers at the GARP-sponsored webinar on Black Swans and Reputational Risk held on August 26, 2014. Black swan events are “close to impossible to estimate impact and likelihood,” such as the Japan 2011 tsunami, or Hurricane Katrina. The complexity of these types of risk “requires that we focus on what is most important” in strategic risk management, said Boultwood, naming four principal areas: […]
“They Kill Things!”
Enterprise risk management (ERM) should aim to fill the strategic advisor role, which is the most valuable role, said Jim Fitzmaurice, Executive Advisor at Corporate Executive Board (CEB), because “the strategic advisor focuses on improving risk-informed strategic decisions.” Fitzmaurice, who advises both CEB Audit Leadership Council and CEB Risk Management Leadership Council, was the first of two speakers at the August 26, 2014 webinar on Black Swans and Reputational Risk sponsored by the Global Association of Risk Professionals. Fitzmaurice began by showing how the evolution of ERM has been a progression in the prominence of its role and a concomitant […]