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Causal CapitalOperational Risk & the study of causation July 20, 2008 The Barometer of the US Equity MarketThere is a theory in many US equity market centres known as the January Barometer which goes something like the following: Continue reading "The Barometer of the US Equity Market" Posted by Martin Davies at 05:13 PM | Comments (0) June 15, 2008 Its not an oil crisis, its a dollar crisisIf you want to boil a frog as the saying goes you put it into cold water and raise the temperature slowly for if you throw a cold frog into hot water it will leap out. The US dollar is such an animal and over the last few years there has been some speculation on the deprecating value of the dollar but such talk until lately seems to have been background noise. Like our boiled frog until the temperature raises too high no one notices but in the last five years the US dollar has depreciated against the Euro by 35%. Continue reading "Its not an oil crisis, its a dollar crisis" Posted by Martin Davies at 02:37 AM | Comments (9) May 01, 2008 Its just human natureI read all this garb about the SocGen deal, lack of internal control, failed control processes, collusion between the front and back office; come on be real did this guy just go delinquent? No I would say management, may be not at the top, but halfway up the ladder had to be in on the job; surely. Well on the spectrum of matters we know they are one of two things: Assuming the bank has some definition of risk appetite these people are either incompetent or corrupt; which is a worse place to be? If one draws a line between these two positions, management probably sat somewhere at a place where they tolerated huge positions while the ticket was paying but cut it when the tide turned. Good honest fair people I am sure. This is one of the problems with trading losses from operational risk (trading outside policy), it is the modus operandi of it all. Traders are rewarded on performance as are most artisans in most professions however in the broker environment this encourages increased risk taking. Under the typical model, risk aversion and return are negatively correlated (through a narrow quantile of the correlation range) that is less risk aversion higher yield; so to enjoy marginal utility of reward, a trader must continue to step further from the baseline of risk aversion until there is of course negative marginal utility of return. One can liken it to ethanol consumption, the first drink is just an appetiser for the second and after the fourth, light dirty humor and a savage grope of ones appendages is a pleasant place to be, after the tenth unit the negative aspects of intoxication through saturation become evident, unfortunately well after the fact and the only cure is to ditch the margin account by unwinding anything that is open and then to vomit profusely only to commence the whole process again a week later. Continue reading "Its just human nature" Posted by Martin Davies at 04:10 PM | Comments (0) January 13, 2008 Is there any point in AML?Over the last few months some of the media attention on the craziness in the financial sector leaves one pondering whether perhaps some of the risk approaches employed by banks are worthy of the budgets underlying them. None the less, I meet enough of these risk managers to believe in them, just. I do pity situations such as the one at Barclays only a few days ago. Continue reading "Is there any point in AML?" Posted by Martin Davies at 04:04 AM | Comments (1) December 23, 2007 Home-Host discussions continueAbout a month ago the Bank for International Settlements released its Home Host supervisory cooperation and allocation mechanisms in the context of AMA. This can be found at BIS Paper While this brings a long debate closer to a definitive rule set, it isn`t a done deal yet, mind you BIS themselves don`t claim it to be so either; ``This document elaborates on the home-host paper by applying the home-host principles and practices emerging in the broader implementation of Basel II`` however ``a range of practice in this area has not evolved as yet.`` Continue reading "Home-Host discussions continue" Posted by Martin Davies at 02:24 AM | Comments (0) December 21, 2007 Who's in and Who's OutAfter living in Australia for some years or perhaps anywhere relatively pleasant, one does start to feel a bit connected to the people, businesses and ethos of the land and only the other day I read the APRA publication on whos in and whos out for Basel II accreditation with some interest. Who made it? Continue reading "Who's in and Who's Out" Posted by Martin Davies at 12:53 AM | Comments (0) December 19, 2007 Throwing it around at UBSOver the last couple months there has been quite a substantial amount of discussion regarding the sub prime mortgage crisis and the collateralized debt obligation instrument, mortgage backed securities and the likes. In much respect I haven't made any formal statement on this ongoing event outside the occasional commentary debate during morning coffee but after reading the news this morning in respects to UBS and their current situation, one does really wonder what kind of risk systems, if any, some of these big banks are running. Continue reading "Throwing it around at UBS" Posted by Martin Davies at 02:30 PM | Comments (0) October 01, 2007 Simpson's ParadoxRecently I was at one of those typical conferences where pensive bankers float around the tea and cakes while the hoard of speakers promote one novel yet convoluted topographic framework after another. Some of the speakers delivered quite convincing, highly vocal demonstrations crammed to the brim with hard hitting cliches and a bouquet of consultant friendly diagrams but were alas such empirically vacuous pieces of work. My abdication from frustration finally came during the break where I was lucky enough to entertain an intriguing conversation with a lonely soul who was propping up the symmetrically stacked chocolate eclairs. He claimed that in his opinion control self assessment is the longest running institutional fraud of the operational risk camp and even with game theory under check by auditing departments directly, the results were staggeringly wrong. Business units that were showing the highest signs of improvement when benchmarked seemed to have most of the problems, how could this be? Perhaps the problem lies in a Simpson's Paradox. Continue reading "Simpson's Paradox" Posted by Martin Davies at 02:56 AM | Comments (0) July 17, 2007 Is this the demise of Dow?Like all things in the universe nothing is forever and an era that stretches out a hundred and eighteen years is about to come to closure. Dow has been so tied to that of markets, market risk and trading that I felt it worthy to pay homage to something that has been the very genius loci ('The Spirit') of the American markets for over a century. Continue reading "Is this the demise of Dow?" Posted by Martin Davies at 10:28 PM | Comments (0) July 12, 2007 Who is up for a trolley of Herstatt?An interesting trend that is beginning to amuse me is the ever increasing segmentation of exposure types. Only a few years ago, perhaps one generation and well before ISO 9000 standards on quality existed, banks in general really only saw risk in a handful of domains. The first is an obvious play because it in itself is the merchandise of underwriting risk and is well known as the business of insurance. Staying in the domain of putting a value (dare I say a bet) on a threat would also take in the business of market based investment which is known to most as market risk and this is defined by the Basel committee as the risk of losses in on-and off-balance-sheet positions arising from movements in market prices. The pure domain of choosing to put funds at risk or not would also translate to lending and credit risk features very heavily in the Basel Accord. Today however I look up on some of the risk news sites and we have a whole shopping trolley of risk products including but not limited to interest rate risk, energy risk, weather risk, political risk, country risk, model risk and a new comer 'Corporate Defense Management'. The latter I personally see as an extension of operational risk, none the less people are talking about it even though one does have this real sense that some of the community out there are creating their own spins on an event to lobby their circumstances favorably. These people seem to wrap up a threat in risk classification propaganda to give it credibility and fear, then sell the world a panacea to such a pathogen. Now if I were to ask you 'Do you know your Herstatt Risk'? You'd probably ask what are you going on about Martin and yet Herstatt risk is the very creature that kicked this whole risk regulation game over in the world of banking. So what is this Herstatt thing? Continue reading "Who is up for a trolley of Herstatt?" Posted by Martin Davies at 03:13 PM | Comments (1) June 19, 2007 Well Intentioned is often not so in practiceIn a macabre yet very sobering place there are two types of human dysfunction which are fascinating to watch played out and the Sarbanes-Oxley act seems to embody both of them. The first is a reactionary panic to an event and the second is the tenacious tendency of people to refuse to let go of something that is truly broken, they hold on in all hope that one day its purpose will be realised but in making that happen they pull everything else around them apart. Continue reading "Well Intentioned is often not so in practice" Posted by Martin Davies at 05:36 PM | Comments (0) May 25, 2007 A reason to defend VaRIn continuing on with the debate on VaR, I agree with some of the comments that were made to the previous blog article and I accept I was hard with my critique. Sure VaR may not be the panacea of risk measurement that it is proclaimed to be but it has some good attributes, starting with the way in which it translates relatively well from market to other disciplines of risk such as credit and this is kind of neat. What is the saving grace is that it is parametrically based and focuses on losses. Up until VaR became a relative standard some banks used what I would classify as exciting alchemy to define the chemistry of causality for their potential loss with the occasional Fibonacci related approaches really taking us to the exotic edge of measurement. Many organisations didn't adopt anything cognisant at all and some still operate this way. Continue reading "A reason to defend VaR" Posted by Martin Davies at 04:14 PM | Comments (2) May 18, 2007 Defending an argument against VaRA recent article published on RiskCentre news from the author IRA staff on the subject 'Will Basel II finally discredit VaR' left me shocked and raised an eyebrow, actually both of them shot up. This journal critiques some of the assertions that were made against a backdrop of logical thought but before we begin I have to state one theme left me slightly disappointed. When someone slings hard unjustified criticism against a maxim but does not offer an alternative we are left with little option but to diffuse some of the affirmations into the pool of white-noise. All that said, being a dedicated risk professional I feel it my duty to at least point out another light on the hill in the relative risk world of darkness. Continue reading "Defending an argument against VaR" Posted by Martin Davies at 11:28 PM | Comments (1) May 11, 2007 MAS is CRAFTing a Risk AssessmentThe benefits of the CRAFT approach to risk assessment in Singapore, drawing on the unique approach that the Monetary Authority of Singapore has engaged to measure risk across the Island. Continue reading "MAS is CRAFTing a Risk Assessment" Posted by Martin Davies at 05:14 PM | Comments (0) November 26, 2006 Principles based approach to regulationAbout a month or so ago, the FSA released a statement encouraging what it calls as a Principle Based Approach to regulation. The FSA is often held in high esteem by other regulators globally as being forward looking to policy and enforcement but many critics argue their new initiative could be extremely complex to install. Continue reading "Principles based approach to regulation" Posted by Martin Davies at 04:38 PM | Comments (2) |
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