Libor Fallout: Part 1. The Stomach Ache During the Heart Attack
The emerging scandal around the setting of LIBOR (the London Interbank Offered Rate) prompted GARP (the Global Association of Risk Professionals) to convene a panel of three experts to inform its members about the background and implications of the LIBOR fraud. On December 20, 2012, the first presenter at the GARP webinar was Amy Poster, Strategic Adviser at Iron Harbor Capital Management. She described the background and key facts. Calling it the “$800 trillion scandal,” Poster said that these events touched many derivatives markets, various consumer debt instruments such as credit card loans, and 100 percent of the sub-prime market. […]
Contingent Capital: The Case for COERCs. Part 2.
“Many people have misgivings about [contingent convertible bonds] because they just don’t know how to value them,” said George Pennacchi, Professor of Finance at University of Illinois. He was the second speaker at the November 29, 2012 GARP webinar on the subject of Call Option Enhanced Reverse Convertible (COERC) bonds. Click here to go to Part 1. Pennacchi, along with Theo Vermaelen and Christian Wolff, co-authored a recent paper proposing a new type of cocobond. [Contingent convertible bonds, or “cocobonds,” are bonds that convert into equity when the market value of capital falls below a trigger level.] “The paper provides a […]
Contingent Capital: The Case for COERCs. Part 1
Contingent convertible bonds, or “cocobonds,” are bonds that convert into equity when the market value of capital falls below a trigger level. A major problem with cocobonds is that “the conversion trigger is based on the capital ratio, which is known to be a poor indicator of financial distress,” said Theo Vermaelen, Professor of Finance at INSEAD. He was the first speaker at the November 29, 2012 webinar held by the Global Association of Risk Professionals (GARP) on the subject of Call Option Enhanced Reverse Convertible (COERC) bonds. Vermaelen referred to a case in point: a Credit Suisse cocobond issued […]
The State of the Credit Markets: Part 2. Global Trends
“Political uncertainty creates a bimodal distribution of risk, which is very difficult for the markets to price,” said Seth Rooder, Global Credit Derivatives Product Manager for Bloomberg, and the second of two speakers at the Global Association of Risk Professionals (GARP) webinar on November 15, 2012. (Click here to view Part 1.) Rooder was referring to the first of five main themes in global risk trends, as he sees them. They are: (1) Economic and political uncertainty (2) Slowing global growth (3) Central Bank (CB) intervention (4) Continuing low yields (5) Increased regulation Ever since the financial crisis of 2008, […]
The State of the Credit Markets: Part 1. The Curious Case of the Euro Zone
“The euro zone is caught in the middle of two opposing forces,” said Alberto Gallo, head of European Macro Credit Research for Royal Bank of Scotland (RBS) and a featured speaker at the Global Association of Risk Professionals (GARP) webinar “The State of the Credit Markets” on November 15, 2012. He was referring to the forces both “positive” (European Central Bank liquidity and low interest rates) and “negative” (heavy debt and increasing fragmentation) in the euro-zone financial markets. Gallo pointed out that, in the last 20 years, banking in Europe has grown tremendously. At €35 trillion, bank assets are now […]
Basel III Burden: Part 3. “Our Business Achieved Tangible Benefits”
The third and final speaker at the October 18, 2012 GARP webinar on the Basel III burden on profitability was Alyson Bailey-Flynn, Director in Global Analytics and Financial Engineering at Scotiabank. She had a good news story to share. “Improved risk management meant improved decision-making,” she said, prior to delivering a brief survey of the implementation of risk management at Scotiabank. When it came to market risk calculations, management was both for and against spreadsheet usage. (“For” because it meant ease of use; “against” because it meant lack of control.) Ultimately Scotiabank chose an in-house batch risk engine powered by Algorithmics Risk […]
Basel III Burden. Part 2: The Devil is in the Data
The second speaker at the October 18, 2012 GARP webinar was Peyman Mestchian, Managing Partner, Chartis Research. The Basel III “journey” will have three main impacts in financial institutions, he said: (1) Improved capital management. Mestchian believes banks will figure out how to adapt “without sacrificing their efficiency”; (2) Greater integration of risk, compliance, and finance functions. There will be overlapping responsibilities for Basel III, between front office, finance & treasury, and risk & compliance departments; and (3) Implementation of enterprise-wide risk management systems. Under Basel III, “capital optimization has a much higher profile,” Mestchian said. “Due to short timelines, […]
Basel III Burden: Part 1. From Too-Big-To-Fail To Too-Small-To-Survive
Basel III regulations are onerous and complex, but must ultimately be managed, according to a panel of three banking experts who made presentations during the October 18, 2012 Global Association of Risk Professionals (GARP) webinar to an audience estimated at around a thousand. The webinar follows on the heels of a McKinsey report that estimates banks’ average return on equity (ROE) will drop from 20 percent ROE in 2010 to 7 percent upon Basel III implementation. The session was kicked off by Mario Onorato, Senior Director, Balance Sheet and Capital Management, IBM, who talked about business models and IT implications. […]
Managing Risk Beyond Asset Class Diversification
“The ‘new normal’ in asset allocation must be forward-looking and driven by macroeconomics, said Sébastien Page, Global Head of Client Analytics, Executive Vice-President at PIMCO. He was addressing a CFA Society Toronto luncheon on October 15, 2012 in Toronto’s historic National Club. Traditionally, asset allocation focussed on diversifying according to asset class. In the ‘new normal,’ Page recommends diversifying across risk factors. “Think of asset class as simply a container of risk factors,” he suggested. He gave another metaphor in line with the luncheon crowd. “Think of risk factors as components like proteins, carbohydrates, and fats. An asset class would […]
Risk-Adjusted Performance Measurement. Part 2: Everything But the Kitchen Sink
The risk measures, both ex post and ex ante, that formed the hands-on component of the one-day workshop on risk-adjusted performance measurement at the CFA Society Toronto offices, are covered in greater detail by the book Practical Portfolio Performance Measurement & Attribution. The author (and workshop leader), Carl Bacon, gave the workshop participants a whirlwind tour on September 17, 2012. This continues a recap of the highlights begun in Part 1 of this posting. Simple risk measures are “stand-alone” for a given portfolio (e.g., variability and Sharpe Ratio), or they are calculated in conjunction with another benchmark or portfolio (e.g., […]