March 2016 wasn’t a good month for so-called internal risk models, the quantitative tools constructed by banks for determining such vital numbers as how much buffer capital is needed to protect the savings of their clients.
ΝΒ: This is not a post about real whales and the ongoing struggle to keep these magnificent mammals alive for future generations to marvel at. Hopefully the individuals who have risked their lives to bring the near extinction of many whale species to worldwide attention will not take offense with us usurping imagery linked to this valiant campaign. We simply want to draw attention to another, rather more armchair type of campaign, namely: saving the_AMA risk model. A bit more esoteric as a cause, but ultimately a good cause nevertheless_
The Top Ten list of why Silicon Valley cannot Disrupt Wall Street (yet) was published first here in October 2014
From Open Risk, to all our friends, colleagues, collaborators, users, partners and the public:
Financial services jobs continue being decimated. A recent (as of the initial post date) FT article was a sobering summary of the continuing transformation of the financial sector: 2015 alone has seen more than 10% reduction of the total workforce across large EU/US banks:
It has become trendy since the financial crisis to be wearing an anti-complexity hat in matters concerning the shape of the financial system. This is an understandable reaction to the entangled constructions that had sprung to existence in the hyper-leveraged markets of the naughty noughts.
Chances are that your knowledge of ancient Peruvian culture is a bit rusty. Maybe you have some vague high-school memories of an extensive but backward empire that was conquered and then asset-stripped by a handful of Spanish conquistadores. Or maybe your best preserved memory is the excitement of reading von Daniken’s speculations that the Nazca lines are extraterrestrial spaceports. But unless you happened at some point later in life to hear about the work of Prof. Urton or his collaborators, most likely you have no idea what a quipu is (see image above).
The Zen of Modeling aims to capture the struggle for risk modeling beauty
The web as we now know it burst first into the open in the early nineties. It certainly did not start among the more socially active classes. It was an invention by and for nerdy CERN physicists, to exchange data about elementary particle experiments. But it wasn’t long before academics figured out additional valuable uses of this technology: You could put your face online, along with a CV. This is how “personal” webpages came to life. Those early home pages were mostly dour affairs, replete with long publication lists.
You walk to the center of an old city, and you see its glorious cathedral lying in ruins. What in the world has happened here? Your investigative instinct goes into overdrive. This is not supposed to happen. Not in peacetime anyway. How can it be that this magnificent edifice, after gracing the town’s central square for who knows how many centuries, is now little more than a rubble pile in the center of town?
There is(/was) renewed interest in EU-land over deepening a capital markets union, aka CMU. It is among the initiatives being pursued by the Commission in order to help accelerate growth in the European Union.
The initiative encompasses many elements, both around equity (shares) and debt markets. One important pillar of the CMU aims to re-launch some version of an EU securitisation market. This segment was never really defined in a EU-wide basis. In the pre-crisis European financial landscape there were wide disparities in the degree of adoption, legal frameworks, preferred structures etc. among the different countries comprising the EU. In any case, since the financial crisis there has been a steady decline in securitisation volumes, which amongst others, hinders certain types of exceptional central bank measures (i.e., purchasing securitised assets).
(See BIS D304)
Our view is that securitisation is fundamental financial technology and there is no intrinsic technical reason why it could not be harnessed to best serve the functioning of modern economies.
This page is a summary of a presentation given at the 2014 Autumn TopQuants Meeting, aka, the Open Source Risk Modeling Manifesto.
The current framework of internal risk modeling at financial institutions has had a fatal triple stroke. We saw in quick sequence: market risk, operational risk, and credit risk measurement failures, covering practically all business models.
In our personal lives, it is the balance between work and life, or the dreadful weight balance. In the professional sphere it might be the balance between debt and equity in the financial industry, or the balance between convenience and citizen privacy in the new tech industry, or the welfare of the many balanced against the property of the few, or finally the geopolitical balance of power of different peoples Balance ensures sustainability as it helps steer away from the risks that lurk at the extremes. It is actually hard to find scenarios in which a balanced approach would not be the optimal way to complete any meaningful journey. Maybe in a world with full visibility and zero risk.
Financial Risk Modelling has suffered enormous setbacks in recent years, with all major strands of modelling (market, credit, operational risk) proven to have debilitating limitations. It is impossible to imagine a modern financial system that does not make extensive use of risk quantification tools, yet rebuilding confidence that these tools are fit-for-purpose will require significant changes. These need to improve governance, transparency, quality standards and in some areas even the development of completely new strands of modelling.