Risk Models: From Governance to Validation: Part 3. Examples
“The calculation of the spread on the tranches is quite involved but essentially boils down to dependencies between names,” said Frederic Siboulet, Principal at iEpsilon and the third of three speakers at a GARP webinar on risk models held June 11, 2013. The tranches in structured credit products he referred to were apparently diversified, but in reality not so. Siboulet chose to illustrate the subtle and embedded risk of models with actual structured product examples. In particular, he said that “We must not overlook the importance of the parameters and their interpretation.” The first example involved stressed correlation within a […]
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 Models From Governance to Validation: Part 1. Don’t Forget the Story
The best practices of risk models–and model building–boil down to one thing: “we can’t forget the story behind it,” said Peter Went, VP, Banking Risk Management Programs at GARP. He was the first of three speakers at a GARP webinar on risk models held June 11, 2013. “There must always be a qualitative story expressible in quantitative terms.” And, vice versa, since any model reduces the complexities of the real world into snippets of mathematical relationships, the opposite must hold true. Went, a trained econometrist, described three main types of models. Fundamental models are based on rules relating basic variables […]
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 […]
Risk Intelligence for Value Creation: Part 1. The Levers in the Cockpit
The strategic focus of financial executives and institutional investors must be risk intelligence, not just risk management, according to Leo Tilman, President of Tilman & Company, author, and adjunct professor of finance at Columbia University. He was the first speaker on May 28, 2013 at a webinar organized by the Global Association of Risk Professionals (GARP). In the words of Peter Drucker, institutional investors must understand “the future that has already happened.” Tilman said investors need to have a vision for growth and relevance in the low growth, low return environment post-2007. “Does a firm have a holistic framework for […]
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 […]
Evolution of the OTC Swaps Markets. Part 1: “Futurization” of Swaps
Recent reforms to the swaps market can be thought of as “the futurization of swaps,” said Nathan Jenner, COO Fixed Income E-Trading at Bloomberg. He was addressing a webinar audience on May 14, 2013 as the first speaker in a panel organized by the Global Association of Risk Professionals (GARP) on the evolution of the market for over-the-counter (OTC) swaps. Five years ago, “derivatives were perceived as a catalyst in precipitating” the financial crisis of 2007-08, said Jenner. For example, it wasn’t immediately apparent who were all the counterparties to the AIG swaps. Pricing was “murky,” he said, and risk […]