Limit frameworks are fundamental tools for risk management: A Limit Framework is a set of policies used by financial institutions (or other firms that actively assume quantifiable risks) to govern in a quantitative manner the maximum risk exposure permitted for an individual, trading desk, business line etc. Why do we need limit frameworks? A limit framework is expressing in concrete terms the Risk Appetite of an institution to assume certain risks.
Credit Portfolio Management in the IFRS 9 / CECL and Stress Testing Era: The post-crisis world presents portfolio managers with the significant challenge to asimilate in day-to-day management the variety of conceptual frameworks now simultaneously applicable in the assessment of portfolio credit risk: The first major strand is the widespread application of regulatory stress testing methodologies in the estimation of regulatory risk capital requirements The second major strand is the introduction of new accounting standards (IFRS 9 / CECL) for the measurement and disclosure of expected credit losses
The data privacy genie is out of the bottle: From Yahoo’s massive email data leaks, to Equifax’s exposing of sensitive data for a large segment of the US population, to Apple’s resisting the bypassing the security features of the iPhone, not a week goes by without some alarming piece of news around data privacy. The ramifications for the legal use of private digital data by companies and government and the consequences of illegal or unintended use are huge.
How to Stress Test Financial Weapons of Mass Destruction: In recent decades we have been collectively spared the haunting images and existential anxiety provoked by the sight of detonating nuclear weapons for testing purposes - not to mention the increased levels of radiation in the atmosphere and other side-effects. This achievement is largely thanks to a series of treaties to control nuclear bomb testing that have been signed and enforced by most (unhappily not all) countries worldwide.
There is a legend that every time a data set is released into the open, somewhere dies a black swan The Promise of Open Risk Data: Well, it is not a true legend. Legends take centuries of oral storytelling to form. In our frantic age, dominated by the daily news cycle and viral twitter storms, legends have been replaced by the rather more short-lived memes and #hashtags. Black Swans need no introductions The whole informal theory of black swans concerns improbable events (low likelihood events) that come as a nasty surprise and have large impact.
Seeking clues for financial stability from quantum physics: How physicists discovered why the world is stable Physics is one of those remarkably successful branches of science that have helped shape the modern era. Let your gaze drop on any man made gadget in your surroundings and its likely that its working principles go back to a fundamental discovery in physical science that dates back no more than two hundred years or so.
If banks were airlines: Ever since the scary turbulence of the Great Financial Crisis it has been instructive and illuminating to compare the travails of the financial industry with the state of other industries, especially those more down to earth, also known as real world industries. The automotive industry was particularly handy for good analogies: Almost all of us have first-hand experience with the successes and failures of risk management when it concerns cars and driving.
Fintech Risk Events: Fintech Risk Events is an open catalog of observed and publicized operational failures of fintech business models. The catalog aims to document, in due course, such events reasonably accurately, to allow risk managers understand the (potentially new) vulnerabilities of new financial services models. Scope The scope of the operational risk database is Fintech companies. By that we mean newly established financial services providers that operate exclusively via new (digital) platforms and are (mostly) unregulated.
The Atlas of Bad Risk Management: The Atlas was discovered recently in archaeological work studying pre-crisis civilizations. Despite the obvious wear and tear, all key risk failure areas have been preserved. We note the remarkable diversity of organizational forms and economic structures. Most interestingly, there is even an uncharted territory that was rumored to be inhabited by black swans. We handed over this invaluable treasure to a risk management expert and asked her to identify any similarities with modern risk management challenges.
Visualizing the risk management of the future: How do we communicate risk insights? The information tools used by risk managers to communicate insights have been transformed multiple times over the ages. In each era we have adopted existing technologies, but we also created demand for new technologies. Our era is no exception. To understand where we are going, we need to understand where we are coming from. So lets briefly recap our industrious past before we peer briefly into the visually exciting crystal ball.
Save the AMA whale: 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.
Risk Management Internship: In finance, it’s the best of times, it’s the worst of times It is a special moment to start a career in financial services. We are walking amid the ruins of the previous financial order. Fallen banks, broken markets, negative interest rates, shell-shocked economies and discredited theoretical assumptions. We see the enormous cost and impact to the welfare of society of a less than perfect financial system which has not kept pace with the advancement of our general knowledge and technical capabilities in most other domains.
Correlation Radar added to the Dashboard: About the Correlation Radar: The EU Risk Dashboard is a web app developed by Open Risk to assist with the exploration and understanding of the large number of economic indicators published by the ECB in its Statistical Data Warehouse. The app data are derived from the timeseries available in the Warehouse. Most readings in the currently selected series are monthly or quarterly and are updated when those become available at the Warehouse.
FX Lending Risk: A stress testing methodology for analyzing FX lending risk. Extends standard credit risk modelling tools to capture the increased risks of FX lending in a consistent way Financial Weapons of Mass Destruction Warren Buffet famously declared financial derivatives as weapons of mass destruction (although apparently this did not prohibit him from using them when convenient). The leverage afforded by such contracts, their potential complexity, or simply their novelty which may imply lack of understanding, are some reasons why one would classify them as potential contributors of systemic risk, which is a polished rephrasing of the more popular this sucker is going down quote.
Business Model Risk - The Forgotten Risk Type: Sustainable business models that demonstrate adequate profitability over long horizons are key to a healthy market economy. This applies to firms and organizations of any size and in any sector. But how do we determine what is sustainable and how can we tell a risky business structure from a stable one? On the small-scale end of the size spectrum we have the domain of startups and SME’s.
Risk Management Skills for the Fintech Era Risk Management Skills for the Fintech Era: 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: As main drivers for this true jobs hecatomb are cited higher minimum capital requirements (that depress Return on Equity and hence require lower costs to restore it to investor acceptable levels), low interest rates that erode Profitability Margins, and a generally subdued economic landscape which reduces Volumes.
Seven Heavens of Finance and the Open Risk API: Back-to-basics is not salvation 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 noughties. Yet shifting through the ruminations and proclamations one cannot help but get the impression that there is a sort of denial of the complexity that underlies the real economy.
Unbundling the Banks: A How To Guide: Talk of unbundling the banks is all the rage these days (if we believe the fintech startups). Yet upon closer inspection one gets the feeling that these optimistic people might not necessarily know exactly what they are trying to unbundle, the true complexity of a medium to large bank, which in turn reflects, at least in part, the complexity of our modern financial system.
Open Source Risk Data with MongoDB and Python: Open source software is all the rage those days in IT and the concept is making rapid inroads in all parts of the enterprise. An earlier comprehensive survey by Gartner, Inc. found that by 2011 more than half of organizations surveyed had adopted open-source software (OSS) solutions as part of their IT strategy. This percentage may have currently exceeded the 75% mark according to open source advisory firms.
The periodic table of risk elements: You know the periodic table of elements, even if you flunked your science courses! It is the large colorful and blocky table that hanged on every school’s classrooms before becoming yet another mobile app. The periodic table is one of the early and iconic achievements of science. It lists all the pure chemical elements found in nature, the building blocks of all possible material substances.