Just wrapping up a trip to Hong Kong and Macao where I spoke at Citibank’s Asia-Pacific Banks Conference on “Managing Risk in the New World”. A wide spectrum of Asian banks was represented in this excellent conference hosted by Citi’s Global Transaction Services business.
My theme is loudly that of keep-it-simple and back-to-basics, and it is time we re-discovered a strong common sense approach to financial markets and risk. Fear and greed remain key drivers of most of our crises, although to quote a former SEC chief “to blame greed for the financial crisis is like blaming gravity for a plane crash” !
Models don’t kill markets, people do. Let’s definitely not blame rogue models for landing us where we are now. It is time to do more on stress-testing and concentrations-analysis, and to form a much better understanding of liquidity and correlations than we do now. And it is more than time to become humble, as a clan whether you are a trader or a lender, a rating agency or a regulator, an economist or a risk manager!
Speaking of stress-testing, there continues to be a huge clamor for more discussion on this market-wide. Nobody really has this right, and while everybody seems able to do a good power-point presentation on the subject, the brass tacks are really tough. I am speaking more about scenario analysis & stress-testing than ever before, at a wide range of forums. More on this later, and on VaR, Risk-Appetite, Capital, Liquidity...there is much to talk about, and a good crisis not to allow to be wasted
Meanwhile, I have persuaded my good friend Aditya Rana in Hong Kong (ex-Citi, Morgan Stanley, AIG Financial Products) to put his increasingly popular newsletter on this site. Watch for this. I promise you something really worth the read. Watch also for Vikram Malkani’s (Citi, Lighthouse) post coming up.
Talk to you again soon ….
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Bottom line is that you can create as many models you like, at the end of the day it is the driver behind the wheel that keeps it on the road. So a focus on culture of an organization is in order.
ReplyDeleteShakti Jauhar
I wonder if it is still in the interest of markets for regulators and political administrations to keep coming down on these financial institutions. Geithner can churn out all the bank taxes and whatever else Obama wants for public approval, but curbing risky behavior and promoting adherence to operational and credit risk might be out of the reach of the government. Or is it? Whose responsibility is it to promote humility and prevent rash behavior in markets? Should stress-testing and scenario analysis be conducted on a more macro-level, i.e. on behalf of a central political institution? As an Economics-History student, I mean these all as genuine questions! Hope the trip was smooth!
ReplyDeleteInteresting Perspective of where the Industry should head. Good to see Capital Management and Stress Testing Techniques are increasingly being used by Small -Large Banks as is Risk Analytics. Key is to review these models almost on a monthly basis for various changes to the economic, political and regulatory environment which was not done in the pre-crisis years. Hope we learn and get better.
ReplyDeleteSankar Krishnan
Banking & Financial Services
Sutherland Global Services
NewYork, New York 10016
To Shakti's point: Absolutely. Companies need to discover the culture (and credo) they want to operate under; this has to come from the top all the way down from the Board and CEO. Time for a re-awakening and re-positioning of the Human Resources function ?
ReplyDeleteAsh: Great points, and questions. Some of the eggs turned out rotten, but you cannot kill the golden goose for that (!) ... or cut off your nose to spit our face ?!
ReplyDeleteRegulators and politicians cannot let markets and companies abdicate their risk responsibilities to them. Firms need to buy the idea that good risk management and good behavior are vital to doing good business. Is there a concept of "corporate happiness" meanwhile that we can chase as a goal. Where are the shareholders whose activism should be the primary stakeholders in this ?
Interesting point re centralized stressing. I guess that is where the efforts against "systemic risk" are focused.
Sankar: yes totally; and keep the "context" of the models in perspective, as well as the key "assumptions" that drive them. Understand the limits of "certainty" baked into the outcomes. And most importantly, have the guts to ask the very humble, maybe even "duh", questions like "What if we are wrong"
ReplyDelete