SSG on risk appetite and IT

The reports of the Senior Supervisors Group are always worth reading. Here's the latest.

http://www.fsa.gov.uk/pubs/other/ssg_2010.pdf

On March 6, 2008, the Senior Supervisors Group1 (SSG) released its first report, Observations on Risk Management Practices during the Recent Market Turbulence. The report assessed the risk management practices that helped make some firms better able than others to withstand market stresses in the autumn of 2007. On October 21, 2009, the SSG released a follow-up report, Risk Management Lessons from the Global Banking Crisis of 2008 (the “2009 SSG report”), which reviewed in depth the funding and liquidity issues central to the crisis and explored critical risk management practices warranting improvement across the financial services industry. In addition to pinpointing various risk management areas in need of strengthening, the 2009 SSG report raised the concern that recent changes to firms’ risk management practices might not be sustained as memories of the crisis faded and pressures to pursue revenue opportunities increased.

A number of environmental factors have changed since the release of the 2009 report, including considerable progress toward raising global regulatory standards for capital adequacy and liquidity as well as a substantial easing of pressures in broad financial markets since the height of the crisis. Concurrently, however, market uncertainty has grown regarding the strength of sovereign finances and the resiliency of the banking sectors in some countries. These changes to the financial and regulatory environment underscore the importance of remediating the risk management weaknesses identified in the 2009 SSG report. In particular, firms must be able to make forward-looking and well-informed strategic decisions that can shape their ability to remain profitable while also managing risk prudently in the face of material economic, market, and regulatory events.

For help in guiding those strategic decisions, financial institutions will need to make demonstrable improvements in two key areas identified in the 2009 SSG report: 1) articulating a clearly defined risk appetite for the firm, and 2) monitoring risk effectively through reliable access to accurate, comprehensive, and timely quantitative information. The Financial Stability Board echoed this sentiment in a November 2010 report, Intensity and Effectiveness of SIFI Supervision (the “SIE report”), which urged supervisors to ensure that systemically important financial institutions (SIFIs) develop and maintain state-ofthe-art risk appetite and data aggregation capabilities. Specifically, the SIE report emphasized that more stringent criteria be applied to these areas, given the complex and broad array of financial services offered by SIFIs. In any case, all financial institutions will need to devote board and senior management attention, as well as significant financial and human resources, to developing these tools for use in adapting strategies to a changing business landscape.

Since the issuance of its 2009 report, the SSG has continued to meet regularly to discuss emerging supervisory and risk issues and to work collectively on selected risk management weaknesses exposed during the crisis. This report delivers observations about the interdependence between formal risk appetite frameworks and highly developed information technology (IT) infrastructures and considers how elements of those frameworks and infrastructures can be implemented effectively. We view these practices as crucial in providing the risk information that boards of directors and senior management need to make well-informed judgments — not only about risk management but also about their firms’ forward-looking business strategies.

Is Ireland solvent?

Is Ireland solvent?: "Is Ireland solvent?
By: Wolfgang Münchau und Raphael Cottin
This is a short essay on Irish solvency. We assume that Ireland takes the money. There may be a political crisis. The government will almost certainly lose the elections, now to be held in January. But whatever happens, Ireland will take the money eventually. There is no other choice. The interesting question is: what then?"


Nationalise all the Eurozone banks, re-staff all the regulators with people who can understand concentration risk. Start again.

Details - reset all mortgages to something like the current value of the property.

Impossible fiscal help - ECB sends 1,000 euro cheque to everybody in the Eurozone to kick up aggregate demand.

FT Alphaville » Shadow banks, shadow sovereigns

FT Alphaville » Shadow banks, shadow sovereigns: "Shadow banks, shadow sovereigns
Posted by Joseph Cotterill on Nov 25 15:58.

This is not your usual sovereign contagion post."

Complexity is a risk all by itself - nobody really understands what's going on and so we are uncertain of what action to take when a problem arises.

Yep, it's fraud: New Economic Perspectives

New Economic Perspectives:

This is the sort of talk we need! Cut the crap, just tell it like it is.

"Every link of the home finance food chain was designed to promote fraud—from the mortgage brokers and appraisers who conspired to overvalue property to stick buyers with overpriced homes, to the mortgage lenders who preferred the riskiest mortgages to maximize interest and fees, on to the investment bankers that packaged them into securities that they bet would blow up, and to the credit rating agencies who conspired to certify the junk as triple A. We should not forget the hedge fund managers who worked closely with investment banks like Goldman to re-securitize the very worst stuff into CDOs, sold on to Goldman’s gullible customers, nor the mortgage servicers (who not coincidentally happen to be the same biggest banks that created the toxic mortgages) who now maximize late fees as they drag out foreclosures while preventing loan modifications."

While trying to get my mind around the problems of the Irish government debt levels I came across this 2007 survey from Oliver Wyman: http://www.oliverwyman.com/ow/pdf_files/SPI_CS_0107.pdf

The relevant quote on Anglo Irish Bank is on p23:

Anglo Irish Bank owes much of its success to a concentrated focus on business lending, treasury and wealth management in the Irish, UK and US markets. Business lending, its largest and most profitable segment, has grown by 38% annually over the last 10 years. A centralized loan approval process has helped the bank maintain high asset quality and minimize the risks of portfolio concentration. In addition, the bank has exploited synergies among its narrow business mix to achieve a low cost-income ratio of 27%, providing a strong foundation for organic growth.

Anglo Irish went bust in 2008 mainly because of its centralized loan approval process that led to very low asset quality and excessively high portfolio concentration.

It's another warning to us all; unless we're actually sitting in the decision making centres of the financial institution on a day to day basis there is no way we can accurately make the sort of statements made by Oliver Wyman. Even if you think you're in the decision making centre we know there can be catastrophic stresses building up that aren't reported.

It seems the purist (simplest?) thing to do would be for the Irish government to put the all the troubled banks into bankruptcy, and then argue long and loud that:

• it's not the government that defaulted - the government might have guaranteed the debts, but it was lied to during the negotiations, so all guarantees are off;
• all lenders (apart from retail depositors) need to be reminded what credit risk really means - which part of the word "risk" don't they understand?
• Senior secured lenders can be given the banks' assets (good luck to them) - unsecured and junior lenders get wiped out;
• It's then up to the German and French governments, if necessary, to bail out their banks that lent to Irish banks.
  

Comments welcome.

FT.com / Companies / Financial Services - Departures at Gartmore could spark end game

FT.com / Companies / Financial Services - Departures at Gartmore could spark end game: "Others are more critical. A top 20 shareholder in Gartmore, who has seen the value of his shares collapse from 220p when purchased in the IPO to just 107p yesterday, said: “There are serious questions to be asked, [such as] why a company which was so reliant on just two people was allowed to list in the first place."

The more serious question is why did this top 20 shareholder invest in a company with such a large risk?

New Economic Perspectives: Let's Set the Record Straight on Bank of America: Open the Books!

New Economic Perspectives: Let's Set the Record Straight on Bank of America: Open the Books!