Exchange Ideas
Risk Management in Emerging MarketsMy weblog will focus on risk management and modeling in emerging markets December 08, 2009 Strengthening Islamic Banking : Takeaways from WIBC,2009Strengthening Islamic Banking : Takeaways from World islamic Banking Conference, Bahrain Banks should
Posted by Sunando Roy at 03:16 PM November 30, 2009 Dubai : What Next?So, its there for all to see - free fall of Dubai and Abu Dhabi index, investor sentiment turning adverse reflected in higher risk premium and the prospect that Dubai may face a major jolt in its aspirations to become a global financial hub. Real estate prices are predicted to fall by 20-30 per cent more. To add to all this, the region as a whole may face a setback just when it was coming out of an inactive first half of 2009. And all of this for a potential debt default which the Central Bank of UAE has vowed to defend in a belated yet notable communication. Why all ths , if the debt can be defended, if other Emirates are willing to come with rescue packages. Wasn't this crisis unavoidable? Continue reading "Dubai : What Next?" Posted by Sunando Roy at 09:53 AM | Comments (0) November 29, 2009 The Dubai Deb(t)acle and the High Cost of Poor Reputational Risk Management"It takes many good deeds to build a good reputation, and only one bad one to lose it" – Benjamin Franklin once observed. The recent Dubai debt crisis has pointed towards poor reputational risk management. One can understand the need for debt restructuring in the face of a huge liquidity problem, as has happened in the 1980s and 1990s in many emerging markets, leading to IMF led salvage operations. Dubai, clearly, is not in that league. Its funding opportunities had not dried out , it had the support of the other Emirates and seemed solvent to global lenders. Though jolted by the real estate crisis, the Dubai model seemed robust enough to withstand the financial tsunami and making a comeback in due course. The surprise decision therefore reflected poor judgement. And, more importantly, poor reputational risk management. Continue reading "The Dubai Deb(t)acle and the High Cost of Poor Reputational Risk Management" Posted by Sunando Roy at 10:49 AM | Comments (1) November 22, 2009 The Crucial Issue of Board Level Compensation- Emerging Regulatory FrameworkThings are changing fast in an area traditionally shrouded in confidentiality. The issue has raise its head in the afternmath of the financial crisis. As directors give direction to the company's growth trajectory, along with senior management, they play a critical role in the future performance of a company. And they are paid heftily for such action. some such ambitious actions have landed many banks and FIs in trouble in recent times. Therefore, the financial crisis of has brought to the fore a number of policies governing director and executive remuneration. Some Issues in Board Level Remuneration
o The Structure of Director's Remuneration The structure of directors´ remuneration should promote the long term sustainability of the company and ensure that remuneration is based on performance. Variable components of remuneration should therefore be linked to predetermined and measurable performance criteria, including criteria of a non-financial nature. Limits should be set on the variable components of remuneration. Significant variable components of remuneration should be deferred for a certain period, for example three to five years, subject to performance conditions. Further, companies should be able to reclaim variable components of remuneration that were paid on the basis of data,which proved to be manifestly misstated. It is necessary to ensure that termination payments, so-called ´golden parachutes´, are not a reward for failure and that the primary purpose of termination payments as a Schemes under which directors are remunerated in shares, share options or any other right to acquire shares or be remunerated on the basis of share price movements should be better linked to performance and long term value creation of the company. Therefore, an appropriate vesting period should apply to shares, whereby vesting is made subject to performance conditions. Share options and rights to acquire shares or be remunerated on the basis of share price movements should be not be exercisable during an appropriate period and the right to exercise them should be made subject to performance conditions. In order to further prevent conflicts of interest of directors who hold shares in the company, these directors should be obliged to retain a part of their shares until the end of their mandate. In order to facilitate the shareholders' assessment of the company's approach to remuneration and strengthen the company's accountability towards its shareholders, the remuneration statement should be clear and easily understandable. Moreover, further disclosure of information relating to the structure of remuneration is necessary. In order to increase accountability, shareholders should be encouraged to attend general meetings and make considered use of their voting rights. In particular, institutional shareholders should take a leading role in the context of ensuring increased accountability of boards with regard to remuneration issues. Remuneration consultants may have conflicting interests, for instance when they advise the remuneration committee on remuneration practices and arrangements, and at the same time advise the company or the executive or managing director(s). It is appropriate for remuneration committees to exercise caution when hiring remuneration Continue reading "The Crucial Issue of Board Level Compensation- Emerging Regulatory Framework" Posted by Sunando Roy at 02:36 PM October 16, 2009 Imagining Basel III : An Agenda for the FutureIn a recent conference,an interesting question was hurled at me- How will Basel III look like? And is there a need for Basel III? My response was somewhat like this: Basel Approach has its uses, though time has come for a major enhancement I said that in the past, particularly after September 2008, lot of my friends have sent it to the dustbin of history. There is a strong feeling that Basel II should be thrown out of the window. However, I made it clear that i do not subscribe to such a view. Continue reading "Imagining Basel III : An Agenda for the Future" Posted by Sunando Roy at 05:29 PM | Comments (3) October 03, 2009 The Swine Flu debate in BahrainThe Kingdom of Bahrain is actively debating the Government decision to extend the summer holidays in the schools here to prevent an outbreak of swine flu. In media and social circles, the Government's decision is being actively debated. While the Government stands firm on its decision to keep schools shut till Oct 11 and then reopen in a phased manner with the KG segment resuming early November, many parents feel that the decision is more driven by panic and the education of children suffer unnecessarily by this precautionary and preventive action by the Government. Among the not so small sample of parents encountered by me, majority appears to be against the Government move in no uncertain manner. And I find myself in the minority ( at least in the sample) group that supports the decision. My support comes from my tracking of the spread and intensity of the pandemic from its early days and my belief in the role of good risk management in optimising risk and return. Let me pen down my views on the issue based on statistical evidence. 1. Fear of the unknown My first concern with the disease is that we do not know creature. In the present forms of its mutation, the virus is resistant to many drugs. with almost 3,42,000 cases and 4000 deaths,this puts the reported death rate over 1 per cent. This means that 1 out of 100 cases will die of swine flu. This is not due to operational failures, this is because of our lack of knowledge of the disease itself. When complications occur, doctors know little about the course of action. 2. Reported Age Profile of cases Clear statistics is not availble, but there are some indicative trends. In the US, out of 137,000 cases, more than 50 per cent were in the age group of 0-15. kids, it is now more or less accepted , are more prone to risk than adults. Sample statistics of US and Uk puts the death rate for kids in the range of 1.9-3.8 per cent, mostly in the schoolgoing age of 5-15 years. This statistics means that kids are about 3-4 times in danger than the adult population. Utmost care for kids is thus the bottomline. 3. The Death Rate of Swine Flu has not abated The latest stats from WHO ( Oct 2 update no 68) shows that the death rate from H1N1 virus has actually increased from 0.42 in June 2009 to 0.76 in September 2009. The rise is a matter of concern, even when the media coverage has come down considerably. This means that the disease has become deadlier in the recent past , reversing the earlier trend. This is not good news. 4. WHO guidance on School Closure as prevention Please read the WHO guidance carefully. It says that it is much more effective to close schools before a substantive outbreak. After the outbreak, a school closure is of limited value. Bahrain Government's action finds support from the following WHO guideline: Continue reading "The Swine Flu debate in Bahrain" Posted by Sunando Roy at 03:39 PM | Comments (0) May 08, 2009 Stress Tests, Business Strategy and Capital AllocationIn 1994, JP Mogan started an effort to come up with a single risk number which can summarise the risk of loss in the huge portfolio of the bank spead across sectors and regions around the world. The methodology, made available over the net in late 1994 gave birth to a very important risk measure- the VaR ( Value at Risk). The risk measure was embraced by the world in no time and by 1996, the Basel Committee had issued its market risk capital calculation paper recommending VaR as a possible internal models approach. Pretty soon, it became clear that VaR can measure the maximum potential loss under normal conditions. If markets turn adverse, VaR can't predict the loss. The risk manager needed an extra tool to handle such stressed market scenario. The Stress tests were then introduced to handle what VaR could not, the worst case scenario, something like the one we saw last September- October. Continue reading "Stress Tests, Business Strategy and Capital Allocation" Posted by Sunando Roy at 07:05 AM | Comments (0) November 05, 2008 Contagion in the Interbank Market : Can we contain it?The recent financial turmoil has highlighted the deep rooted problems in the globally integrated interbank market. The recent loss of trust in the interbank market has contributed to bank collapses, huge erosion in market capitalisation and panic among investors. As we slowly and steadily restore a semblence of normalcy, it may be appropriate to take a close look at the crisis of confidence in the interbank sector and the possibilities of containing contagion triggered by this crucial segment of the global financial market.While the research below traverses the period prior to the global financial turmoil, it provides key insights to the contagion routes and possibility of restricting the cascade effect in an integrated financial landscape. Continue reading "Contagion in the Interbank Market : Can we contain it?" Posted by Sunando Roy at 12:43 PM | Comments (0) October 23, 2008 Turmoil in the US Pension Funds SectorTwo disturbing news reached us today. Two major players in the Pension Funds Sector have lost ( notionally, as of yet) billions of US dollars as a result of the current financial turmoil. First came the news that the Pension Benefit Guarantee Corp (PBGC )lost $3.1 billion in stock investments in its trust fund in the 11 months ended Aug. 31, House Education and Labor Committee Chairman George Miller announced today.Mr. Miller, D-Calif., announced the loss at a hearing in San Francisco, according to the committee’s website. He also said the Pension Benefit Guaranty Corp. invested a significant portion of its funds in mortgage-backed securities, according to the release. The other news involved the California Pension fund with an investment portfolio of USD 233.4 billion has approximately lost 20 per cent of its investment value. Continue reading "Turmoil in the US Pension Funds Sector" Posted by Sunando Roy at 02:26 PM | Comments (0) September 18, 2008 Uncertainties about Credit Portfolio ModelsThere is a huge loss of confidence in the financial marketplace. Who would otherwise think that despite the massive US $ 85 billion bailout of AIG by the FED, the markets will continue to slide. The intervention is real, not talking the market up. The faith in the market is completely destroyed, at least for the time being, and the faith is the central bank has dented. The impact of US $ 180 billion is yet to be seen and one hopes that the Central Banks together can overpower this crisis of monster proportion. ( Hooray, the Dow is in the green as I write, so it may be that we still believe our central banks) One silent casualty has been the Credit portfolio Model that churned out default probabilities and expected loss numbers. Quite clearly, the present group of credit portfolio models will be reassessed and one is hopeful that the soul searching will lead to better modeling in future in arriving at the economic capital. Once we come out of the current state of the market, and start thinking about the nightmare with some poise ( hopefully, sooner than later)Models that depend upon PD, LGD, EAD and Default correlations will undergo a post mortem. Let's think of a few issues that may come up with credit portfolio modeling.
Continue reading "Uncertainties about Credit Portfolio Models" Posted by Sunando Roy at 05:26 PM | Comments (2) September 16, 2008 Risk Management and Economic DevelopmentDevelopment Economics , when it started evolving with a lot of new nations getting out of their colonial mould post World War II, was all about growth. growth was the be all and end all indicatorof development of a nation. It was defined by GDP , both overall and in per capita terms. This view of development remained deep rooted over several decades, before economists such as Amartya Sen and others started expanding the concept of development, to be adopted by the United Nation in due course. Thus were born the alternative indicators of development, including inequality, quality of life and human development. this happened in the late 1980s and early 1990s. Further challange to the notions of development was provided by Sen in his 1998 classic Development and Freedom and later in his Identity and violence: The Illusions of Destiny. Sen brought forth the new insight that freedom is a critical aspect of progress without which material wealth failed to find any clear meaning.Continue reading "Risk Management and Economic Development" Posted by Sunando Roy at 02:53 AM | Comments (1) The Forgotten Tail of Risk Management: lessons from the financial turmoil of 2007-?it is evident that Risk Management will no longer be the same once the financial markets risk above the debris of the credit crisis of 2007- ?. It also appears that risk regulation will also undergo a major change if not a complete overhaul. the press conference statement by Paulson a few hours ago reflecting weaknesses in regulation reaffirmed the understanding that lot of soul searching is going on in the regulatory community.In this turbulent time, we are faced with many questions. Why were so many brilliant guys sleeping when the problem was piling up day by day? Why did tons of statistics churned out by agencies, literally on a tick-by-tick basis, failed to capture the early warning signals? Or is it that the sane voices got submerged in what Greenspan termed " creative destruction brought about by financial innovation"? Posted by Sunando Roy at 01:09 AM | Comments (4) September 05, 2008 Rocky Road to Economic Capital ModelingEconomic capital modeling in financial organisations is aimed at determining the capital requirement for its risk taking activities. With the Banks adopting Basel II standards in emnerging markets, many of them are struggling with quantification of capital to be required under the Internal Capital Adequacy Assessment Process ( ICAAP). With the adoption of ICAAP, economic capital model has gained in complexity. The popular building block approach that adds capital allocated for all significant risks has been supplemented by estimations of business line capital requirement and even disaggregations leasding to calculation of exposure wise capital requirement. In other words, in banks with better economic capital models one can actually look at capital requirements at a granular level. Continue reading "Rocky Road to Economic Capital Modeling" Posted by Sunando Roy at 06:30 AM | Comments (0) August 22, 2008 Beneficial dialogue : Supervisory Risk Review Process in the Banking Sector :The banking sector performs a crucial intermediation in the economy – it mobilises funds from those who have funds without avenues to utilise them to those who want to use it for business but do not have them. This is the basic process of banking, which gets manifested in diverse forms of deposit attracting and disbursal activities. In this process, banks acquire expertise on various types of business financing and start several advisory and underwriting services. Pillars The three pillars of Basel II, aimed at measuring the capital adequacy of banks ( Pillar 1), managing enterprise-wide risks ( Pillar 2) and disclosing appropriate risk-related information ( Pillar3), are accepted as industry benchmarks of best practices for the banking sector. As supervisors of the financial system, the central banks are interested in maintaining the stability of the financial system to ensure that the economy moves on a steady growth path. As adverse financial conditions are detrimental to economic progress, risk management systems are seen as crucial preventive mechanism. To ensure financial stability, therefore, the banking supervisor makes an active entry into the risk management scene in the Pillar II Supervisory Review Process (SREP). SREP aims to enhance the link between an institution's risk profile and its capital. It is essentially based on a dialogue between the supervisor and individual banks, with the intention of ensuring that the institutions have sufficient capital to support all its risks. The dialogue, as the Committee of European Banking Supervisors (CEBS) has noted, '...should embrace all aspects of business risk and control risk, including risk management systems, internal control systems and internal governance'. The Financial Services Authority in the UK observed, "Our dialogue (in Pillar 2) will be of sufficient depth for us to come to a view on the appropriateness of risk management practices and capital adequacy of each firm in a group." The Australian Prudential Regulations Authority explained that, while conducting the risk assessment exercise, it 'will draw upon all the relevant information sources and analytical tools at their disposal'. The assessment process will include analysis of 'the inherent risks facing the institution, the effectiveness of management and controls and the extent of capital support to meet the unexpected losses'. The process of risk assessment therefore encompasses all the material risks faced by the bank. In such an assessment materiality and proportionality of risks play key roles. While assessing the risk profiles of the banks, the supervisor asks two questions: (i) how material are the risks faced by the bank; (ii) how important is the bank to the overall financial system? The depth of the supervisory risk assessment is greater for banks that are inherently riskier and also for banks important in the systemic context. Finally, the Supervisory Review Process interfaces itself with the internal capital calculation of banks to cover all its material risks (ICAAP). In ICAAP the banks come out with their own assessment of the material risks faced by them. Being the bank's assessment of their own enterprise wide risk, the ICAAP is therefore thoroughly assessed by the supervisor in their risk assessment of banks, involving a detailed flowchart The International Monetary Fund in its latest (July 2008) assessment of world output growth has pointed at Asia and the Middle East as economies where robust growth is expected in the few years to come. As the economy grows, there will be more demand for investments in economic sectors, housing development and greater consumption. Banks will have to do more business in meeting the demands from both investors and consumers. Hectic activity in the banking sector in the Middle East is thus likely in the near future. SREP has already been initiated in Gulf economies. In Bahrain, the supervisor, the Central Bank of Bahrain, is pro-actively looking at the risks faced by the banking sector in Bahrain. While the ultimate outcome of the process is still not known, this has put banks in Bahrain in an 'alert' mode, in terms of revisiting their risk management models and aligning their framework to the best practices. The Supervisory Review Process has not only set the ground rules for risk management processes in banks, but initiation of such a dialogue is definitely bringing banks closer to the much-needed enterprise-wide risk management practices, where all risks are discussed not in isolation, but under a single structure. While the process enables the banks to understand their risks better, it empowers the central banks in their management of financial system, thereby improving financial stability. A robust risk management framework at the bank level, a proactive regulator with necessary information on risks to the banking sector and greater awareness among the masses through improved disclosures — the supervisory assessment of the risks in banks is likely to craft a win-win situation in the financial sector. -- Recently published in Gulf News Banking Quarterly ( Q3)and targeted at non-risk professionals who are working or interested in the financial sector. Posted by Sunando Roy at 09:59 AM May 23, 2008 The Trillion Dollar Meltdown and the Three Trillion Dollar War: Linking Fiscal Policy and Risk ManagementRecently, I came across two books. The first one was an obvious choice,The Trillion Dollar Meltdown- Easy Money, High Rollers and the Great Credit Crash by Charles R Morris dealing with the Subprime crisis. The scond book "the Three Trillion Dollar war: by Stiglitz and Blimes discussing the true cost of the Iraq war. Reading both in sequence sets me thinking about the linkages of fiscal policy, macroeconomic management and risk management. It appears that the contents of the two are linked to each other, like perfect fits in a jigsaw puzzle. The messege that comes across in the book is something like this- State, even with all the hype about market capitalism, is a big ticket spender in the economy. Its fiscal policy results in the rise in consumption, savings and credit worthiness of millions. If state spending is distributed well, the credit worthiness of many in the economy go up and they are able to service their accumulated debt in a better manner. In a society already stooped in debt, the impact is even higher. If on the other hand, the spending, trillions of dollars in this case , are diverted to replacing military machinery and similar stuff, distributional impact of fiscal policy is uneven. The fiscal policy then creates the unwanted impact, decline in savings of population and consequent erosion of creditworthiness, something which the average credit/gdp ratio will definitely hide. Thereby, fiscal policy create conditions for a financial crisis, which banks and financial institutions , in their zest for greater market share, may lose sight of. Financial crisis, can, thus be seen as a fallout of lack of distributive justice in fiscal policy. Posted by Sunando Roy at 09:20 AM | Comments (3) |
 CategoriesArchives
Recent Entries
|
