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This blog will discuss the latest developments & spot futuristic trends that would impact the Risk Mgmt practices and skills.

 

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January 17, 2009

GRM- Global Risk Mgmt and Governments Risk Mgmt with a $5 trillion plus kitty

Wishing everyone a happy and safe new year!

2008 was a humbling and disruptive year for the Financial sector, specially the bulge bracket Investment Banks as well as Risk Management profession on the whole. Many epitaphs will be written for legendary institutions that disappeared overnight and will be spoken about for decades to come in terms of the crunching global impact and the associated learnings. About $650bn of sub-prime bonds outstanding in March 2008, about 75% of them being rated triple A at issuance, and banks raised around $600 billion in 2008 worldwide to survive. This blog sets the context to a global development with wider and long term implications for the Risk Management role and function of the Governments and Sovereign Wealth funds.

GRM - Global Risk Management or Governments Risk Management
With FDIC chair floating the Aggregator bank idea this morning, there is a fascinating convergence of free markets and role of Governments as Risk Managers of last resort. There is an ongoing global risk management effort that although coordinated in some parts (e.g. G7, EU) and disparate in other parts of the world, does show signs of an orchestrated and coordinated effort. The different measures listed below really being the tactical components of a broader and longer term Governments Risk Management effort to rescue firms and economies -
1.Unprecedented direct intervention by Govt. bodies and regulators like FDIC in overnight in takeover/shotgun sales of financial institutions
2.Unprecedented but time bound Governments pledge to guarantee all loans and deposits
3.Bailouts plans such as US TARP
4.Stimulus packages
5.Benchmark rates cut
6.Assumption of toxic securities
7.Equity stake and nationalization in extreme cases
8.Interbank and debt guarantees
9.Recapitalization
10.Asset Restructuring body/Aggregator bank

Today, it is very rare to hear debates on the role of direct government intervention even in the strongest bastions of free market economies. In the past it had been very subtle support and interventions by Sovereign Wealth funds (SWF), but never of the current scale.

Below is a summary of the global risk management efforts of governments of some of the major developed and emerging economies around the world.

USA - $ 850bn (6% of GDP) - $ 700bn TARP; $300bn guarantees, FedReserve rate cut to 1%, $1.3 trillion bank lending, $150bn stimulus package, ($ 500bn planned by new govt)

China - $586bn (16% of GDP) – 2 yr stimulus comprising rural infrastructure, social services, railroads, airports, health, education, housing & more

UK - $ 450bn (21% of GDP) - $311bn to exchange illiquid securities for govt. debt, $116bn to recapitalize, $389bn guaranteed new bank debt, $23bn tax breaks

Russia -$ 209bn (12% of GDP) - $ $50bn credit line for Corp debt refinance, $88bn bank loans,$19bn stock market support

Germany -$ 151b( 7% of GDP) - $101bn in new capital, $25bn bad loans cover, $504bn interbank guarantees,$25bn tax breaks

South Korea - $ 80bn (9% of GDP) - $25bn stimulus, $55bn forex loans for exporters, $100bn guarantees for banks forex liquidity

Japan - $ 68bn (1%of GDP) -2 stimulus packages incl. tax cuts, tax breaks, credit guarantees,$322bn loan guarantees for small & midsize businesses

France - $ 50bn (2% of GDP) - $13bn to recapitalize($37bn more pledged), $403bn interbank guarantees

India -$ 41b(5% of GDP) - $ $4bn loans to mutual funds, $37bn in bank loans due to reserves rate cuts

Summary: The GRM program around the world is committing to around $5 trillion plus with amounts committed being anywhere from 1% of GDP to a high of 21% of GDP in UK. Many countries GRM initiative includes nationalizing failed financial institutions as well. So the GRM is a facet of Risk Management that will remain in forefront for years to come and CRO’s

Takeaways –

1.An additional dimension for CRO to deal with, if their institution is subject to GRM activities

2.Lessons learnt from GRM will feed into a heavier touch for Regulators in industry Risk mgmt

3.The lessons learnt by governments around the world in rescuing” Too big to fail” firms will have an impact on the future viability and ambitions of the “financial supermarts” around the world.

4.This GRM effort will have far reaching impact on the Risk Management role of governments and implicitly the role of Risk Management in society.

Sources: Dow Jones Financial News, Issue 635,A year in numbers; Business Week Dec 1 2008(Peter Coy, Enough Shock treatment)

Posted by spachava at January 17, 2009 05:26 PM

Comments

Thanks, Sai , for highlighting this new dimension of the future risk management on account of the Government interventions and bailout funding to financial institutions.Because of its sheer magnitude and ubiquitousness, some have called it nationalization. As the free market economies are fully aware of the economic distortions and allocational inefficiencies ; as the objective is not to widen the sphere of the state in financial markets ( as in nationalization), but only to provide temporary support to sustain the market mechanism by throwing a lifeline, the function of this sovereign funding is act a s a bulwark against market failure.Sure, it has serious implications and consequences for risk management.
At least , I foresee two two things. The regulatory burden may increase as the Governments having channeled the tax dollars will want banks to show to them and to the world how moneys are being applied . And also , the regulatory regimes natural tendency of expanding their turf will receive a boost. Second, the risk-taking by banks may be more guided by the perceptions and predilections of the Government policies rather than portfolio considerations. After all, in some measure, the payer calls the tune! Thus, in my view, if the objective is restore the markets , then the Governments / regulators should guard against two dangers imminent on their funding and policy support:

a. Over-regulation and micro-regulation by replacing the trust in the bank managements by detailed transaction-oriented examinations

b. Risk Portfolio distortions
by interjecting the regulatory wisdom form commercial decisions

Those of us from India have seen these avoidable pitfalls when our weak banks were recapitalized or otherwise funded in the past! Of course, the world and India now know better


Posted by: satchidananda at January 21, 2009 11:06 AM

Thanks Dr.Satchidananda for your detailed comments. Your comments as a former Reserve Bank regulator yourself and a Risk practitoner are very insightful to ensure that the pendulum does not swing too far out.

Posted by: spachava at January 23, 2009 06:13 PM