riskognize

interesting things on financial risk management

BCBS revising sound practices for operational risk management - First thought

BCBS is revising its 2003 'Sound Practices for Management and Supervision of Operational Risk'. The consultative paper for the new version was published a few days ago.

One of the first point I noted in the 2010 consultative paper is the more prominent and hands-on roles of Board of Directors. While the 2003 paper outlines the key roles of BOD as:
  • be aware of major aspects of the bank's operational risks
  • periodically review and approve the bank's operational risk management framework
  • ensure the framework is subjected to effective, independent review
The 2010 consultative paper list as the first principle that the Board of Directors should establish "tone at the top" and strong risk management culture throughout the whole business. The document also explicitly calls for BOD to review and approve risk appetite and tolerance statement, although this is usually the case anyway.

The emphasis on governance is also highlighted with the refined role of senior management who, to quote:

should develop for approval by the board of directors a clear, effective and robust governance structure with well defined, transparent and consistent lines of responsibility.

It is clear from recent events that management of operational risk cannot be left to middle management alone, without real transparency nor consistency across the organization. The revised sound practices paper also enhanced and clarified many of its principles, and reflect both recent events and the industry's responses to the risk environment that faces banks in 201X.

BCBS - Recognising the risk-mitigating impact of insurance in operational risk modelling

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In my work related to Advanced Measurement Approach (AMA) operational risk modeling, the use of insurance is always one of the first questions asked. 

Today, BCBS released a document for comments titled "Recognising the risk-mitigating impact of insurance in operational risk modelling". This aims to provide clarifications and bring the global practice into alignment.

Section 4 cover the important process of supervisors' assessment of coverage and alignment of insurance and banks' operational risk profiles. The paper also calls for independent review specifically of the use of insurance and how it is modelled, in order to qualify for capital reduction.

It also consider and reject the concept of 'experience requirement', which basically only allow banks to have in place the insurance for certain period of time before starting to recognize it as mitigation for regulatory capital. I agree with the paper's rationale that experience requirement is not that useful for the type of risks that insurance is meant to cover (low frequency, high impact) as banks will not learn much more about the nature of the insurance within the period.

In the end, it comes down to - as it often does - banks being able to demonstrate to, and convince the regulator that the method used are sound, and based on reasonable assumptions and convincing data.

On the criteria of recognizing insurance mitigation, the paper clarifies many of the criteria first specified in Basel II Accord, which, while cover many areas, still raises many questions for banks which start to seriously consider incorporating insurance into their AMA models. The most challenging (but reasonable) requirements is still the mapping of insurance cover to the risk profiles.

Commentary: Mortgages Lost in the Cloud - BusinessWeek

Its current manifestation is faintly ridiculous: Lenders can't say for sure who holds a mortgage—which means that sales can't go through. Buyers won't put down good money for a property if they aren't sure they'll get clear title to it, nor will lenders extend loans. Buyers of hundreds of billions of dollars' worth of mortgage-backed securities may have grounds to sue.
via businessweek.com

So much has been said about the recent problem with US mortgage foreclosure documentation. It would be interesting to find out if any other markets had developed mechanism similar to MERS and how do they operationalize it. It seems ridiculous to me to shred the original paper documents after digitization.

BBC News - Societe Generale trader Kerviel jailed for three years

Former Societe Generale trader Jerome Kerviel is facing three years in jail after being convicted by a Paris court.

Kerviel was told he must also repay the damages of 4.9bn euros ($7bn; £4bn) which the bank said it lost through his risky trades.

He was found guilty of forgery, unauthorised computer use and breach of trust.

via bbc.co.uk

According to the plaintiff lawyer, SocGen is not planning to make Jerome Kerviel replay the damages, which is only sensible. The amount (4.9 Billion Euro) will wipe out the net worth of the 106th wealthiest person on earth, going by the 2010 Forbe's list. The damage being awarded is more symbolic and clear SocGen from class action lawsuit, since the statement clearly state it is a solo act, and the bank is not in the know until a few days before the story broke. (I find that hard to believe)