Heat Map Distortion

For most risk systems one big selling point is the heat map. It's tidy, it's colorful and in a macabre kind of way, it really energizes management to stare in ore at risks registered in the red zone. For the consultant it is a dream come true and the more they find wrong with a business, the more valuable they seem to become.

Worthy or not, traditional heat maps distort risk reality, they squeeze risk into a two dimensional perspective that makes the reporting process itself as dangerous as it is useful.

1+1 doesn't equal 2

In the world of risk, statistics, finance and many other fields of endeavour, 1+1 does not equal 2.

It's a little bit complicated but as 1+1 does not equal 2 in the realm of risk and while executives believe that 2 is the answer, our banking system will inevitably continue to fail us.
  

Changing the way we educate bankers

In the next five years the world of traditional banking is going to need to adapt in more ways than we can possibly imagine if it is to survive. These changes are likely to be driven from external factors, that is obvious. Recently however, internal catalysts seem to be appearing in the market that may question the very way these institutions function.

In this post we look at how some banks are starting to rethink their training environments to meet tomorrows banking challenges.

Is enterprise risk a journey or a destination?

A couple of days ago a customer asked me; is Enterprise Risk Management the end game in the world of risk? 

After reading a recent question on an ERM Linked-in forum, which goes something like this: "Is enterprise risk a journey or a destination?" I have been encouraged to write briefly on this subject here.

  

So then, is Enterprise Risk Management a journey or a destination?

China's Reserve Ratio Tactic

As last year drew to a close, the Peoples Bank of China cut the reserve requirement for local banks in an effort to swiftly ease funding liquidity conditions in the country.

In this post, we look at this tactic and why the central bank is doing this.

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?