Risk Balanced Selection of Manufacturing Projects

Question: I have a situation in manufacturing operations where we have to take a judgmental decision on our equipment’s re-furbishing based on visual inspection. It is a very crucial area of the business since it is part of the complex and risky Klinkerization process.

In the short of it, we have to decide whether to replace brick lining which is critical for the survival of the equipment before the next shutdown and that is a year later.

There are several ways I would go about dimensioning risk on this type of potential project and these have been introduced in the presentation that is attached to this post.

How to use external data in operational risk

Under the Basel II operational risk Advanced Measurement Approach for quantifying operational risk losses, banks need to factor external loss data into their internal capital models. The argument is old and has been debated for years but that hasn't prevented the topic of external data resurfacing again and again with risk managers in financial institutions.

In this journal, we look at key practices for implementing external loss data in a banks OpVaR calculations.

Building an Operational Risk System

There are stacks of operational risk reporting systems on the market but in general many of these risk solutions are overpriced and unsophisticated programs. 

So then, why not build your own operational risk reporting system?

In this post we look at building a risk modelling system from the ground up and believe me, it isn't as hard as you may think.

Unified Policy Frameworks

Causal Capital has recently been asked to develop a framework for unifying policy in a bank. We have decided to share our draft approach on this journal because some of our readers are working in this area of banking and might find the presentation interesting and useful.

Please Proceed into this article for the presentation.

The Loss Event Manager

I am having an interview for a role as the risk monitoring and loss database manager. This is under the operational risk unit of a bank. I have worked in operations and intend picking up this role under the risk management unit.

Please how can you be of help in my preparation?

Disturbing News - ECB and Congress broken

This week has been particularly disturbing on the news front. To sum it up, my faith in politicians and fat cat executives who run our financial system has been pretty shaken.

There are three unique pieces of news that I have stumbled across which are just simply appalling to read. Certainly, any hope for a quick resolution to the world's financial problems isn't going to come anytime soon and the entire economy is up for grabs as the dark clouds of recession hang over Europe.

So let's take a look at these three items:

Floating Rate Funds attractive, you decide

In a market of prevailing low interest rates investors returns are humble, often way below what they have enjoyed in the heyday and without any doubt, the yields experienced during the lead up to the 2008 credit crisis. 

It is an economic conundrum or balancing act where on one side of the coin pun intended, central banks lower interest rates to stimulate borrowing but on the other side, that doesn't fair well with investors that are looking for high yields from the risks they take. When interest rates drop at the source or risk free rate, they drop across the board.

One irony is that of Asset Backed Securities. In effect what brought the credit crisis on is also assisting investors escape its deflationary grips and floating rate funds are becoming fashionable, well they were quite exciting before the August market rout.

Who holds your securities

There are two cases that are on-going at present which are interesting to follow.  The first is the MF global lost margin collateral and the second is the Madoff Victims vs JP Morgan debacle. What both these cases have in common is a lack of understanding from investors on where their assets actually reside.

Too Big to Fail

Whether the recent sovereign debt issues are an instigating factor or not, the too big to fail agenda is back on the table for debate among global regulators.

Short Covering Rally and Snapbacks

Short Covering Rally, this is what we are seeing. Well that is the word on the ground among some trader communities. 

Is this a snap back or the start of a recovery?

In this blog, we are going to look at what a Short Covering Rally is and where the market is going.

Resilience and Business Continuity

Resilience is perhaps the most important aspect of a solid business continuity program but when it comes to practice, operational continuity would become the measure of resilience.

The question we are asking today is; which industry sectors or which companies are most resilient?

Volcker me sideways

Volcker me sideways, as the saying goes. Sorry its not a well-known term but I think its about time someone coined it. Really, jokes aside, this Volcker thingy is a vulgar beast and the US regulators need to think long and hard before pushing ahead with the ruling to the letter. 

Interpretations are important as we shall see and sound regulatory guidance will be one of the key factors for determining whether an investment banks business model remains viable at all and whether the ruling itself is effective in any manner.  What might be worse, is that the Volcker rule may encourage the very disorder it is designed to prevent and in this blog we will take a look at some of these issues.

UBS making the wrong adjustments

It was to be expected that there would be many outcomes from the rogue trading event at UBS. Generally speaking, catastrophes of this magnitude have a tendency for inspiring change and they are often seen as turning points in the evolution of let’s rethink the model.  

All this aside, the industry as a whole which takes in the regulators, banking community and freelance risk advisors in this case, would do well to avoid kneejerk reactions.

Three key oversights we should stand back and think about include some of the following: 

Going rogue is in vogue

It appears that little was learned from the Jerome Kerviel Société Générale rogue trading event. However, this time it is UBS that is attempting to explain to shareholders why it has fallen into the same trap of failing to identify fictitious trades on its books.

IBM Acquires ALGO

Mergers sometimes don't add the value investors or customers expect. Is the acquisition of Algo by IBM one such an example?

Basel III is more difficult than first thought

Basel III or the implementation of it is perhaps going to be more difficult to achieve than was first envisaged.

In this relatively short article, we are going to look at some of the problems that are becoming apparent in the Asian banking arena for Basel III regulation.

US Debt Ceiling - one saga finishes another begins

The US deficit or the growth of it has been a problem that has been kicking around for so long now, that it shouldn't come as any surprise to hear that the United States of America is bankrupt. Nevertheless, at the eleventh hour the entire world seems preoccupied watching the US senate debate whether it should raise the debt ceiling or not. We all know in the end that the ceiling will go up and everything will go back to normal, yes?

Caveat Emptor Basel III Conferences and ERM

Caveat Emptor : Basel III Conferences and Enterprise Risk, yes the two are being pushed together.

I find it quite disturbing that there is a whole swag of supposed Operational Risk experts out there from the United States to Australia who are flogging Operational Risk to death.

The USD is dead ...

Last week we discussed the state of the USD and the very real potential for a rethink of the world currency for settlement. This week our argument only becomes stronger as the United States has been put on review by the rating agencies. It may have taken the agencies a while to come to this conclusion (tongue in cheek) but it didn't take the market long to react. The outcome in the currency markets hasn't been favorable to say the least.

This article is a short review of where we are heading but no secrets, I would say that direction doesn't have a bright future as it stands.

EUR/USD Parallax Error

A new monetary system has been debated by many an economist for some time however, now that the big central banks are starting to think about alternatives, we have to question whether we are on the brink of redesigning the world of floating currencies beyond Bretton Woods failure? 

This article was stimulated by Mervyn King's speech from the Bank of England although momentum has been gathering around the topic of rethinking the role of the US dollar for a while. 

How real could this be?

The FSA drops the S

In a sanctimonious move the 'S' is to come out of the FSA and it is to be replaced with the 'C'.  Yes it is going to happen. 

What was once the Financial Services Authority of the United Kingdom is to become the Financial Conduct Authority.  Believe it or not there is nothing "prudential" about it, that responsibility lies with the minister.

Private Banking - Evolve or Dissolve

Private banking needs to evolve if it is to survive.  

In this article we are going to look at the changing market dynamics and the challenges for private banking in Asia.  Private banking has experienced huge growth across both the domestic and expatriate community but it has reached a tipping point where change is imminent. If private banking is to continue to prosper over the coming years ahead, it is going to need to take advantage of these trend shifts rather than push against them.

There are two recommended and outstanding presentation links at the end of this blog which are worth reviewing.

Scenario Analysis for Operational Risk

PRESENTATION [ Fast Download Here ]

There appears to be a resurgence of interest from risk managers to engage formally in scenario analysis. This interest appears to be driven in part, from banks operational risk departments; hoping that they can move their risk framework onto the Advanced Measurement Approach of Basel II.

While Basel-III's predecessor to Basel-II doesn't require any changes to a bank's operational risk framework, some institutions are still looking to improve their operational risk reporting systems and they are attempting to achieve this goal through the scenario analysis route.

In this article we will discuss this recent curiosity in scenario analysis and provide a complete presentation which can be downloaded that explains how to build a best practice scenario analysis program for operational risk.

UK Banks heading for another disaster

Unbelievable but unfortunately it appears that UK banks are heading for another disaster and so soon after the recent credit crisis took grip of the country.

It was reported by the FSA that UK banks have been hiding distressed retail assets on their books by forcing a restructure to the amount of 63% of their entire home loan portfolios. This is dire, perhaps one of the most serious pieces of news I have read for the last six months and it is right up there with the possible collapse of the US dollar. In this blog, we are going to take look at this claim and its potential implications for the British economy.

When it comes to perspective numbers lie

When it comes to perspective, numbers do lie or to be concise viewpoints change even though the real value does not.

What I am talking about are reverse splits and in particular Citigroup's recent reverse split of its common stock.

The Operational Risk Framework Checklist Roadmap

Is your companies operational risk framework up to the mark? 

If you ask a risk analyst about their impression of their companies operational risk systems, which one has to admit is a relatively unframed question, but either way, if you did; the typical responses seem to range between: We're totally sorted or it's kind of there, perhaps we are not really sure.

Then of course how do we really know whether a company is good at managing operational risk or not. The final test of course comes when a business experiences a severe problem that puts its operations under threat and its controls to the test.

In this article we are going to review a check list for an operational risk framework that should be considered by risk management in all businesses. The aim here is to move towards best practice. 

 

Managing oil prices is all about preserving margins

In volatile commodity markets, a firm's ability to profit comes down to one thing: The capability a business has to control the transference of market volatility to margin volatility.

In this article we are going to look at how rising oil prices seem to impact commodity consumers in alternate ways and why investors often misunderstand the impact rising commodity prices have on their investments.

FSB - Progress on Strengthening Financial Stability

Progress on implementing the G20 Seoul resolve for strengthening global financial stability has recently been reported as being on track.

In this blog article we are going to look at what is being done by whom and when specific deliverables are due. This is a massive mandate for the FSB and simply due to the complexity or reach within the program alone, it chances on either being globally impacting or partly missing the mark. 

Nassim Taleb & Richard Herring - The Black Swan Debate

Black swans or to be precise, living with them is an interesting discussion that Nassim Taleb and Richard Herring have captured and published on the internet.

There are some valid and fascinating points from this chit-chat that I believe are worthy of embellishment and that is what I have taken to do here in this post.

Economist Intelligence Unit - Risk Radar 2011

The Economist Intelligence Unit has recently published a survey on risk management preparedness for global businesses which reports some interesting findings.

Continue reading to see summary

RMA Speech - How Basel III impacts Counterparty Risk

PRESENTATION [ Fast Download Here ]

An RMA Singapore Chapter speech on the impacts of Basel III for Counterparty Risk has been made available on the Causal Capital blog page here for download, see the link above. The presentation can also be received by contacting the Risk Management Association.

Causal Capital has delivered two counterparty risk speaking events in Singapore this week. This is the second presentation in the set and it builds on the first document that was designed to review the key components of a best practice counterparty risk system.

 
Continue reading to see the key points that are covered in this presentation.

A component view of Counterparty Risk

Credit and counterparty risk is the risk theme for Singapore this coming week, with two major events running in the city that cover this unique risk discipline in "technicality".

US regulators release new rules for Credit Risk Retention

New proposed rules for Asset Backed Securities have been released by the US regulatory agencies for comment. 

These rules are aimed at addressing the way in which banks securitize their loan portfolios and are a response to one of the main causes for the credit crisis in 2008.

What lies ahead for banks and investors?

ISO 10674 standard for credit rating agencies

International Organization for Standardization has recently published a new ISO standard that targets rating agencies directly. ISO announced this release on the 30th of March 2011 and is classifying the program as the Credit Rating Agency Standard; which will be a unique set of requirements to assist with improving the way credit rating agencies operate and report ratings.

In this article we are briefly going to look at labelled ISO 10674, what this standard aims to achieve, why it has come into existence and how it could be a game changer for the credit rating agencies.

Basel III - Cracks Appear Part 2

In part 1 of the "Basel III cracks are appearing" post which can be accessed by clicking here, we discussed the general misunderstanding on how capital works in Basel III. In this article we are going to look at some of the disparate issues around the new Liquidity Coverage Ratio.

LCR & NSFR

The Liquidity Coverage Ratio or LCR and the Net Stable Funding Ratio or NSFR, work hand-in-hand with capital as a three pronged mechanism and the entire system, can be viewed as an "all encompassing" solution designed to reduce liquidity funding feedback loops. All that aside, there are some broad concerns with the way in which specific elements are being interpreted by national regulators across the globe.

These new aspects of Basel III need careful tweaking to avoid unintended market consequences.

  

Basel III - Cracks Appear Part 1

A few months ago, when I first reviewed the Basel III guidelines, I was relatively positive about the proposal. Sure it is difficult to achieve in places but more or less on the mark. The credit crisis needed a global regulatory response and as heavy handed as it is, Basel III appears on the surface to address the causal factors for the collapse of the markets in 2008.

There are a lot of fears over Basel III which have been voiced by quite a few risk analysts across the planet. These concerns mostly revolve around the following argument that a strict rule is a linear or straight line concept that may not fix the banking system but may dampen economic growth. Yet, if the regulation is not strict enough, it won't be effective.

This interpretation of the ideal behind Basel III is incorrect in my opinion and is driving the banking community to act in a regulatory discordant manner.

In this article we are going to review a couple of concerning eventualities that seemed to have occurred as a response to Basel III. We will look at these concerns from the perspective of the banks and the regulators.

Cat Bonds and Catastrophe

In our first blog article on catastrophes and Extreme Value Theory which can be found by clicking here, we looked at methods for predicting outcomes from climatic events. We are going to follow up in this post with a review of structured products that can be used to provide financial cover for losses caused by weather and other environmental predicaments.

A year of catastrophes and Extreme Value Theory

This year has been particularly negative with respects to natural disasters and the associated impacts that obtrude the livelihoods of those communities affected. Considering we are only a couple of months into the year, the number of catastrophes that have struck various countries around the world is quite astonishing. 

To list a few disasters alone, we saw Queensland which is normally a drought suffering state of Australia inundated with so much rain that mass flash flooding ensued, Christchurch was flattened by an earthquake (warning these images are disturbing) on the 22nd of February and only two days ago Japan suffered the fifth largest earthquake since 1900, along with a devastating tsunami where the estimated damage and loss is currently unknown.

From a risk perspective of disaster management, this article investigates methods for predicting catastrophes and their potential loss. 

We have also followed up with a second article on how institutions can cover the fiscal loss from these environmental disasters by using financially structured products. This posting can be found by clicking here.