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Banking and Risk - Principles Reassessed Following Subprime
VRL Publishing Ltd, March 2008
‘In 2008, the World will suffer from the highest levels of political and economic uncertainty for a decade….the global liquidity crunch will spark a US recession in the next 12 months that requires new thinking on systemic financial risk.’
[World Economic Forum January 2008]
This report presents in detail the best practice methodologies banks need to ensure that their risk management strategy is robust. In the present operating environment the risk manager is the shareholder’s, board’s and CEO’s true friend.
The report presents:
- The most incisive analysis of subprime to date.
- A framework for operational and strategic risk management with key regulatory and compliance issues emerging from Basel II explained.
- Intuitive and non-technical approaches to risk, including the historical, human, philosophical and scientific aspects of the subject with case studies including: The Challenger Disaster and Tiger Management.
- The lessons from previous financial crises.
The Subprime Crisis
The rapid acceleration in mortgage and consumer loan defaults in the USA throughout 2007 and early 2008 (primarily from the subprime credit rated segment) brought a very abrupt end to a decade of unprecedented retail banking growth in the USA and beyond.
Subprime
For some commentators, the USA subprime collapse is simply the end of a long growth cycle, of banks pushing into higher risk markets as they seek out new earnings and reaching the limit (or end) of that particular growth model. For others, the subprime collapse may prove much more profound – a stop to a debt-fuelled, debt-riddled US economy that could take years to ‘correct’.
Global problems
The main problem is that nobody knows exactly how far or deep the market ‘weakness’ will run. Approximately $50 billion in bad loan write-offs had been revealed by banks at the end of 2007, but the final figure is estimated to be much higher, and, problematically, vaguer. Ominously, the subprime debacle has not only significantly impacted the world’s largest economy but also spread dangerously into three other leading economies: Japan, Germany and the UK. The near collapse, £50 billion government bail-out and subsequent nationalisation of Northern Rock has put the global subprime affair into scalpel-sharp focus in the UK.
In the USA, banks have been hit on two fronts: direct mortgage write-offs (credit risk) from their subprime retail customer base, as well as investments in a range of mortgage-backed securities (MBS) investment vehicles such as complex collateralised debt obligations (CDOs).
Outside of the USA, banks have been hit primarily by high-risk MBS investments – though non-US institutions with USA retail banking franchises such as HSBC and Royal Bank of Scotland (under its Citizens brand) have also suffered directly from the ‘Main Street Meltdown’.
All aspects of finance in the spotlight
The massive exposure to the subprime segment by the financial community has put risk and retail financial services in the spotlight, with the reputation of the industry as a whole in jeopardy. For many commentators the most worrying aspect of ‘the credit crunch’ is the sheer speed at which markets became illiquid and ‘low probability/high impact’ events became a reality. The seemingly unconnected $7.1 billion trading scandal at Société Générale has kept the issue of banking controls and procedures very much in the international public spotlight.
The updated version of the report offers an integrated approach towards three crucial areas:
- Credit Risk.
- Market Risk.
- Operational Risk.
The foundations of risk
It presents the foundations of risk, including mathematical tools and systems methodology. Written in an easy to follow manner, it requires no previous experience in maths, statistics or analytics. The aim is to assist and improve the reader’s understanding about what risk really means, focusing on five crucial issues:
- Identifying fundamental risk factors.
- Establishing metrics and determining linkages.
- Taking measurements, testing and controlling.
- Tracking the execution of orders regarding the control of exposure.
- Establishing an effective risk control system and making it work.
The bottom line
The risk manager’s job has become even more important to a bank’s strategic planning and business. Risk is, again, at the top of the table – the risk manager not only has to warn about the dangers but also counsel as to what to do in the crisis in order to take control.
Who should read this report?
Senior executives working within the retail and commercial banking sectors, as well as banking and related associations at the
following levels:
Industry
- Retail Finance and Consumer Credit Industries (credit cards, mortgage, auto & personal loans, lines of credit)
- Industry Regulators
- Post Offices
- Mutual and Community Banks
- Credit Unions
Job Title
- Credit Policy Director, Credit Risk Director, Market Risk Director, Portfolio Risk Director, Credit Manager
- Credit Risk Manager
- Market Risk Manager
- Operational Risk Manager
- Portfolio Manager
What are they looking for?
- Best practice in all operational and strategic aspects of risk management
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