About The Blog
| The Risk Telescope Events Calendar | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#G20 and FSB work on #financial #regulation reform
Another day, another major conference concerning financial regulation reform. While most in Western financial capitals are transfixed by policy developments in the US (implementing Dodd-Frank) and the EU (creating new regulators and new roles for elected politicians in financial regulation), major global discussions on the structure of the financial system are underway half a world away in Korea. The Republic of Korea together with the Financial Stability Board have convened a conference with blue chip names from around the world (not just New York, DC. Brussels, London, Paris and Basel). You can find the official announcement and final agenda here.
A few of the speeches may make it onto individual websites. And, like the Federal Reserve Bank of Kansas City, the final papers are finding their way ultimately into the public domain. But if you are trying to determine how to make decisions today regarding model parameterization, strategic asset allocation, strategic asset and liability management, or regulatory and compliance policy priorities, you will have to do alot of digging to find out what what said and, more importantly, what it means.
The Risk Telescope is committed to helping market participants find more effective ways to track and understand key developments, like those under discussion right now in Asia.
Jackson Hole redux
Last night, as part of The Risk Telescope, I voiced irritation with the Kansas City Fed’s lack of transparency regarding papers commissioned and presented at the Jackson Hole conference. It seems I was not the only person frustrated by this old-fashioned policy.
FT Alphaville reports that the entire program (speaker list; participant list; PDFs of presentations) has now appeared on the Kansas City Fed website. You can access those papers now. There are 12 papers/PDFs/links on the website. Before today, only half of those (6) were available publicly. The process of finding them was tedious. One had to piece together who had spoken from media reports and then go to individual websites to find the documents. Not all documents prepared by academics were available publicly yesterday…but of course all speeches by policymakers in positions of authority (e.g., Bernanke; Trichet; Lipsky) were available.
Of course, readers of The Risk Telescope have already received analysis of the six papers that were available independently yesterday. They will receive analysis of the remaining papers in the next day or so. Don’t hesitate to let us know if you want to join the community of financial professionals tracking these important issues.
Receive the rest of this post by Subscribing to the Risk Telescope Jackson Hole: monetary and macroprudential policy in the spotlight
In today’s wired world, it is stunning to see the world’s leading central bankers and their invited guests spend a weekend in Wyoming discussing the economic and regulatory policy issues of our day with so little transparency. True, some speeches are published by individual speakers. But the full agenda, participant list, and all delivered papers are not available from the Jackson Hole conference sponsors (U.S. Federal Reserve Bank of Kansas City) until months after the conference has ended. Journalists attending the sessions have shared sparingly their observations of the discussions and papers discussed over the weekend. Whether such an approach can continue much farther into the 21st century is a topic for another day.
The dearth of published remarks has a silver lining. It forces us to look at other puzzle pieces published in the weeks before the Jackson Hole conference by leading policymakers who were presumably at least invited to attend the Kansas City Fed conference. The broader perspective yields a different analysis than that presented in the media over the last 72 hours from Wyoming. The media and markets have focused almost exclusively on the remarks of one speaker (Federal Reserve Chairman Bernanke) on quantitative easing prospects in the United States. But those remarks are nearly silent on the vigorous debate underway within the central banking community on the intersection and implications that “macroprudential” regulatory policy can have on the formulation and signaling roles of monetary policy.
This issue of The Risk Telescope analyzes the Jackson Hole public speeches in light of policy signals sent by international policymakers over the last few weeks on the intersection of macroprudential and macroeconomic policy. The inescapable conclusion is that the process by which central banks constrain (or supply) credit availability is broadening dramatically beyond the interest rate channel.
On this point, consensus seems to exist across a range of policymakers and seems certain to ensure that key components of the Basel Committee’s proposed new regulatory framework (Basel 3) will not shift materially in the coming weeks. The bigger questions regarding the precise construct of the new policy tools as well as the balance of authority and responsibility between fiscal authorities and financial regulators remain open for debate. This issue of The Risk Telescope explores that debate in some detail. The implications for the design of financial instruments, risk management and, of course, economic growth are massive.
Receive the rest of this post by Subscribing to the Risk Telescope New approaches to #finance, #risk management and #economy analysis
“Moreover, because of the complex and broader involvement, real and perceived, of governments in the economy, separating policy signal from noise, and execution versus intent, has become as important as – but harder than – forecasting the macro data.” Richard Clarida & Mohammed El-Erian, Financial Times, 3 August 2010
The quote above from today’s Financial Times shows concretely the necessity of adopting a new approach to risk management, economic analysis, and strategic asset allocation focused on the impact that policy (and, thus, mercurial human decisions) can have. It is a point we have underscored to clients since BCM International Regulatory Analytics was founded in December 2008.
The point is simple: a mechanical, quantitative assessment of risk based on historical data is insufficient to guide assessments of the key risks facing senior executives today at financial firms and corporations. Undertaking this kind of analysis is hard, as the quote indicates, because only practical experience at the nexus of politics and business can provide the basis for interpreting the policy signals and their likely impact on different sectors of the financial markets. This is nothing less than a revolution in the world of quantitative finance and risk management… it is what we do every day at BCM International Regulatory Analytics LLC.
Large financial firms and their service providers have always had the institutional capability and human capital to interpret subtle global policy signals. This has been a staple of risk management and asset allocation for a generation at the top-tier firms, benefiting both shareholders and investors alike. It is the value of experience put to work to help make smarter decisions based on facts and knowledge. Modern technology harnessed by BCM International Regulatory Analytics makes it possible for this kind of analytics to be available to a broader universe of financial and corporate professionals seeking to stay ahead of the policy curve. You don’t have to be a large firm to acquire the analytical tools necessary for implementing the approach described by El-Erian and Clarida.
The quiet days of August provide a good time to reflect on whether your existing internal and external analytics services are providing the ability to see around the corner and anticipate tectonic shifts in the economic and regulatory policy space. Are they answering these questions:
- What will be the focus for the November G20 summit?
- How will the G20 agenda affect the scope and substance of credit intermediation for financial firms and corporates at both a granular level and the strategic direction level?
- What are the economic policy implications associated with a regulatory focus on ” macroprudential” policies? What are the regulatory policy implications associated with increased emphasis on economic factors when assessing “macroprudential” and systemic risk?
- How will IT infrastructure be changing in the next few years in light of G20 activities?
- Why is Basel 3 still ground-breaking despite some retrenchment last week? What do those 9 pages of technical changes suggest for the allocation of bank capital and liquidity in the near- to medium-term? How will these changes to the regulatory capital and buffer system affect access to credit for corporates and the shape of economic growth? What are the sovereign risk implications of the proposed Basel 3 treatment of liquidity risk?
- What are the implications for risk management and financial stability policy formation associated with a potential rebalancing of political power inside the IMF?
- Are the US and Europe driving towards a transatlantic regulatory policy split in the financial sector, or are they trending towards convergence to a new norm?
- How will the economic environment constrain regulatory policy choices (and vice-versa)?
If you cannot answer these questions right now, then the time is right for a strategic reconsideration of your information needs. Subscribers to The Risk Telescope and Analytics clients already have the answers to these questions, and have had them for weeks if not months. The answers are sometimes counter-intuitive. Moreover, the situation is fluid and will remain so for a number of years still. More importantly, as the G20 process grinds on, it will become more technical and less susceptible to front-page treatment. Only true experts in global policy will be able to provide the tracking and interpretive tools required to stay on top of these issues.
Our proprietary analytical approach at BCM International Regulatory Analytics (based on almost two decades of experience in US, EU, and global regulatory policy processes) generates tools to distinguish between the noise of the news cycle and real, fundamental shifts. Our fact-based analysis prepares clients to make strategic judgments concerning direction, risk profile, and IT spend based on a proprietary research method. We provide the texture and context necessary to facilitate holistic analysis of the data used and outputs generated by risk management models. It is an approach increasingly adopted by the most sophisticated investors, as the FT quote above demonstrates with elegant prose.
BCM International Regulatory Analytics provides a growing number of senior executives with the tools they need to interpret sometimes subtle shifts in global policy direction that will have a real impact on their business models and the climate in which they will operate for the next decade. If the largest and most sophisticated investors like PIMCO and our existing clients are adopting this analytical stance now (as suggested in the quote at the top of this blog entry), how can you afford not to do the same for a fraction of the price associated with building a comparable internal capacity?
#Banking, Basel, stress tests, the #IMF and the #G20 — return of the state or return to business as usual?
Another week, another set of screaming headlines dominated by Europe….but not the EU. The simultaneous disappointment and relief in the public commentary surrounding these two events over the last seven days demonstrates a serious mis-reading of underlying trends in the policy space. The disappointment is misplaced. While changing the business of model for banking is certainly still a high regulatory priority, the direction of that change is driven by economic reality rather than political rhetoric. The relief is stunning as well; it signals market confidence that European sovereigns (backed by the IMF) will support their banks….not that the banks acquitted themselves well in soft stress tests. Regular readers of The Risk Telescope are not surprised by these outcomes.
Today’s issue takes the events of the last week to look ahead and ask whether we are seeing a mean reversion globally in how international banking standards are set. The headlines suggest a return to business as usual, in which bank lobbyists in Basel guide the normative process. This analysis is superficial. It ignores a more profound shift in global policymaking. It also ignores major political initiatives globally emanating from Asia, which increasingly views the current situation as Act II of the “North Atlantic financial crisis.” The rhetorical similarity to the description of the 1997-98 “East Asian financial crisis” is no accident…and the potential impact on economic and regulatory policy frameworks may be as large.
Specifically, this issue of The Risk Telescope explores the emerging tensions between sovereign and G20 policy priorities, predominantly but not exclusively through the prism of the EU stress tests and the Basel outcomes. The research suggests that profound statist trends to protect domestic banking franchises transcend lobbying activities in favor of “macroprudential” outcomes designed to deliver economic stability (if not growth). The consequences for regulatory policy and asset allocation strategies will be significant if the trend line continues through the autumn. The bottom line is that we have not yet reached a steady state regarding decision-making structures internationally, as Asian economies in particular seek a stronger voice in global policy processes. This will impact the structure of regulatory standards as well.
Receive the rest of this post by Subscribing to the Risk Telescope #IMF on stress testing, scenario analysis, #banking, and #economy #risk
As we head into the (hopefully) quiet days of August, it is a good time to reflect on the importance of targeted and fine-tuned scenario analysis. The EU stress tests provide the latest example of how and why this activity cannot be subcontracted to sovereign states despite the groundbreaking advances in transparency associated with that exercise. Today, the IMF weighs in on the debate, with some views on what constitutes appropriately rigorous stress testing.
Leaving aside the obviously unfavorable comparisons between their approach and the approach adopted by the EU (and, last year, the US), the message is clear: risk managers and asset allocators need to adopt a more multivariate and rigorous approach to their scenario analysis that blends regulatory, economic, and political trend analysis. As the IMF notes: “Efforts are underway by national supervisors as well as international organizations involved in financial stability, such as the IMF and the Bank of International Settlements, to develop new risk-modeling techniques and stress test methodologies to better identify the risks that trigger widespread economic and financial instability.”
At BCM International Regulatory Analytics, we are we positioned to help financial institutions and their corporate clients think through how these new approaches affect their business models and their risk profiles across multiple vectors. Our Awareness analysis through The Risk Telescope and confidential, bespoke Analytics research positions senior executives to take a more strategic approach to assessing the cross-border multi-disciplinary risk environment in which they operate using our proprietary research methods.
Decisions on Basel 3 #banking and regulatory capital
The BIS and the Basel Committee board have reached agreement on the direction of new regulatory capital requirements for banks (Basel 3). The text of their decision can be found here. Understanding the text requires a solid understanding of the underlying proposals, the pre-existing Basel 3 framework, and how those proposals will affect the scale and scope of intermediation services going forward.
Subscribers to The Risk Telescope will be receiving analysis of these decisions and the EU stress testing results this week. Clients will be receiving analysis targeted to their areas of interest towards the end of this week as well.
Those interested in subscribing to The Risk Telescope before the new issue is out can fill out the online form available on the “Awareness” section of this website.
#EU #banking stress tests — the good, the bad, and the ugly
Among the many articles written regarding the outcomes of EU stress tests released today, this piece from the New York Times/International Herald Tribune focuses on the implications for the “healthy” banks that passed. It is a good perspective, not because it quotes me, but because it focuses on the important issue of the implications for the European banking sector going forward rather than playing the name game of which sacrificial lambs were permitted to fail.
Beyond the analysis in the article, here are a few more observations on details not yet seen in the early stories covering the stress tests.
The Good: The sovereign bond haircuts were published on a disaggregated basis both by country and by scenario. In addition, banks from several key countries (Italy; France; Spain) specified the distribution of their sovereign bond holdings not only by country but by whether the holdings are in the banking book or the trading book. In addition, the process by which the haircuts were calculated also were disclosed. Finally, the banking book was also stressed. This last point is important given that most EU sovereign bonds are reported held on banks’ banking books (which are not subject to mark-to-market or fair value accounting). Providing insight into the standard country-by-country values used for PDs and LGDs in the banking book under both the baseline and adverse scenarios eliminates a criticism that only part of the bank’s holdings were stressed. Given the general reluctance to publish any bank-specific results prior to today, these disclosures at this level of disaggregation are a step forward for transparency in Europe even if the actual data and assumptions are far too rosy.
The Bad: Not every bank disclosed the distribution of holdings of sovereign bonds, most notably banks in Germany. More importantly, the calculation method for the haircuts and default probabilities leaves much to be desired, to say the least. The sovereign bond haircuts, PDs and LDGs were all based on sovereign CDS spreads as of year-end 2009. That’s right, 2009. Very disappointing. And probably not very realistic of stress levels even today.
The kind interpretation of course is that sovereigns cannot officially and publicly assume the absolute worst. Last year’s US stress tests assumed unemployment rates last year for the adverse scenario that were already outdated when the stress tests were released. So the EU is not alone in generating stress tests with assumptions that seem rosy in comparison with prevailing market conditions at the time the stress tests are released. The difference is that the vast majority of credit intermediation runs through banks in Europe, so the banks are far more important to economic stability and growth there than they are in the United States. The less kind interpretation is that policymakers in Europe reject the signals the market has been sending regarding potential sovereign default and so choose as their starting point a more neutral starting data point (sovereign CDS spreads at end-2009) that is not corrupted by “inappropriate” volatility. Either way, using such outdated data as the basis for calculating haircuts, PDs and LGDs throughout the stress tests invites attempts at reverse engineering based on today’s market conditions.
The Ugly: The EU’s Financial Services Action Plan years ago successfully created a cross-border banking network in Europe focused predominantly on wholesale lending to corporates. Today’s results do not assess the impact that stress on the parent could have on its subsidiaries and affiliates. Also, the results provide no hint of the potential funding stresses in the European banking system embedded within banks’ cross-border networks. IMF and BIS research has made clear this year that failure to assess stresses on funding throughout an organization risks missing key vulnerabilities. This is not a hypothetical situation.
Take Hungary as an example. One of the consequences associated with cessation of the IMF program there is that the Vienna Initiative is in doubt. The Vienna Initiative crafted a cooperative agreement between banks and the official sector in which parent banks agreed to serve as a source of support for their affiliated entities in IMF program countries, regulators agreed to support these initiatives despite the pressure it might put on regulatory frameworks, and the IMF agree to provide liquidity to the program countries. With the IMF program in Hungary currently itself in crisis, real questions arise regarding how banks will continue to serve as sources of support for their affiliates in that country…and thus implicitly provide stability to the overall economy. The IMF statement released yesterday after meeting with bankers and the European Commission indicates that this is no idle worry.
But overall, the release of so much information when many governments sought to avoid such disclosures can only be counted as a success for Europe. Noone really needed these stress tests to tell them that vulnerabilities exist in the European banking arena. These stress tests provide a window into the scope of support the official sector is willing to extent to the banks. Will that create sufficient comfort in the banking sector to stabilize interbank funding rates? We are about to find out.
#Banking, #regulation #reform, capital, and Basel
With the continuing drama in Europe regarding stress tests assumptions, outcomes and disclosures, it is almost easy to forget that major decisions are imminent regarding a key G20 policy priority: changes to the regulatory capital framework for banks. Today’s Businessweek story highlights what is at stake as the BIS and the Basel Committee board prepare to meet next week. The Basel Committee’s interest in obtaining board advice and approval regarding major decisions has increased since the creation of the G20 process. Whether such heightened “corporate governance” procedures generate more solid consensus that delivers consistent cross-border implementation than in the past remains to be seen…and will be a key indicator of the G20′s effectiveness going forward.
New #EU #Banking Stress Test Release Plan
Today, the Committee of European Banking Supervisors (CEBS) announced a new release plan for stress test results. The planned two week delay between release of aggregated results by CEBS (23 July) and bank-specific results by individual regulators and banks (first week of August) has been scrapped. Instead, CEBS will release aggregated results at 1800 hours. Individual regulators and banks have 30 minutes to release specific results. Then, at 1830 hours, CEBS will release specific results with links to individual bank and/or national regulator websites.
The Risk Telescope last week explored in some depth the potential adverse market dynamics that seemed likely to arise from the EU’s planned two-week hiatus between release of aggregated results by CEBS and release of disaggregated results by individual Member States and banks in early August. The new release plan eliminates many of those potential adverse dynamics and focuses attention where it belongs: on the details and rigor of the tests themselves.
The Risk Telescope 
Keep In Touch
Follow Us
Become a fan
Read us on KindleCountdown:
-
No dates present
Twitter Updates
