Degenerating Bank's Risk Frameworks

It is a tragic end to the year for risk management in banking where the regulator's fascination with Risk Comparability and Risk Framework Uniformity has reduced banking risk management solutions to nothing more than Risk = BCI x ILM.

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".

Wrong Way Risk the Global Credit Crisis and Basel III

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The Global Financial Crisis (GFC), The Credit Crisis, call it what you may, although I fair the latter title came first; has been debated across the world.  Governments, industry small and large, banks, actually I am not sure there are many people in society that have not at the very least been impacted by it.  However, what is not common consensus is the cause.

Was Wrong Way Risk a cause of the Credit Crisis?

Closeout Risk and Exchange Traded Options

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The measurement of counterparty risk for most investment banks is based around Over The Counter instruments, these are derivatives or structured contracts that are sold to the client directly. Banks also take positions through exchanges on behalf of their counterparties and they do this for several reasons:

• Speed of execution
• The ability to transact through one bank account rather than opening another account on the exchange
• Advisory before deal transaction
• The ability to ”hypothecate” or assign available collateral and cash in custody with the bank against exchanged traded positions

Stock exchanges, clearing houses and futures markets keep excess exposure to a minimum and they do this through the process of daily variation margining. However, banks trading on behalf of counterparties, also become responsible for taking care of these margin requirements. In effect, they also need to monitor market volatility to ensure that there isn’t a loss due to close out risk.

Testing Counterparty Risk Systems

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Ahh the world of the OBSI (Off Balance Sheet Instrument) can be a domain full of opacity and while the regulators have been looking to reduce conspicuousness of OTC (Over The Counter) trading practices, investment banks themselves often struggle to embed a pellucid system for measuring counterparty risk.

Like all things, if you want to improve something you are probably going to have to change the way it works or perhaps the way the business works with it.  Additionally investment banks are continually inventing new structured products to capture unique market opportunities or to differentiate themselves from other players in the market and regulators are putting a lot of emphasis on reporting position, depth and leverage for risk – well depth and leverage may not be done cleanly but that requirement will come in time.

Click to read more on how we go about testing counterparty risk systems.