Leverage ratio, Basel debate and a year of surprises

Two weeks on Risk.net, December 23–January 5

LEVERAGE RATIO will harm market-makers

BASEL DEBATE will favour US banks, Europeans fear

REVIEW OF 2016 – facing the strange

COMMENTARY: The unexpected and the uncertain

2016 was the year when the unexpected happened – particularly in the political sphere. Polls and predictions were confounded first by the June referendum, in which the UK voted to leave the European Union, and then in November by the election of Donald Trump as US president.

As Risk.net's review of the year points out, events such as these have created significant new uncertainty about how the industry will function in 2017 – as demonstrated in news over the past two weeks. The long-awaited Basel III regulations, expected to receive final approval by the end of last year, have been delayed until at least March. New regulations proposed in the wake of Brexit, meanwhile, create further uncertainty – most recently a move to compel major banks to bring their European subsidiaries under a single legal entity.

The events of 2016 have led to much soul-searching and self-examination among risk analysts, and to new attention on failures of analysis such as reliance on 'groupthink'.

One of the major causes of the crisis was virtually industry-wide dependence on very similar techniques of risk modelling – when one bank's model failed, its competitors would fail as well. Though disastrous for the financial system, this is reassuring for individual modellers, who can excuse their own failure by pointing out that no-one else seems to have done much better.

As the banking industry has consolidated – especially since the 2008 crisis –  financial stability has increased dependence on a smaller set of institutions deemed "too big to fail". Fewer major institutions means fewer risk models in use, and if banks are benchmarking their results, models and strategies against each other the problem worsens

Fighting against this trend to encourage and elicit dissenting opinions will be an important priority for risk managers in 2017.

PICK OF THE STATS

The EBA's most recent Basel III monitoring report, published in September 2016 and based on end-2015 data, showed 84% of second-tier banks sampled and 60% of 43 top-tier banks were already complying with the 100% net stable funding ratio requirement. The total shortfall for top-tier banks not yet complying was €206 billion, down by more than €1 trillion since the first survey in 2011.

 

PICK OF THE QUOTES

"It is important to bear in mind that IFRS 9 is an accounting standard, so your first level of defence is to make sure your external auditors are happy with it. Regulators will have a comfort level based on how auditors have benchmarked your model. I don't think regulators should have any objection to these different modelling techniques, as long as they produce reasonable, reliable and stable estimates that truly reflect the portfolio quality of the bank" - Ankit Khandelwal, head of Asia solutions for FICO

 

ALSO THIS WEEK

Fed economist advocates combining internal models with SMA
SMA could act as a floor for calculating op risk RWAs, suggests Filippo Curti

Exclude internal stress tests from CCAR, says US auditor
US Government Accountability Office says internal tests weaken incentives for banks to create 'meaningful and severe stress tests'

Fears that bumper coupon could skew iHeart CDS payouts
Market pushes for change to auction date amid fears of reduced single-name and index CDS payouts

Bank CDSs straining under TLAC
UK and Swiss bank Opco CDSs losing relevance as a hedging tool, experts warn

China M&A boom presents unique hedging headaches
Crackdown on ‘fake' deals adds to risk in contingent hedges

Further reading

• Credit markets

Bank CDSs straining under TLAC

• 03 Jan 2017

• Currency markets

China M&A boom presents unique hedging headaches

• 02 Jan 2017

• Basel Committee

Basel IV – a timeline

• 28 Dec 2016

• Operational risk

Fed economist advocates combining internal models with SMA

• 23 Dec 2016

• Risk management

Exclude internal stress tests from CCAR, says US auditor

• 22 Dec 2016