Risk Management in practice

[Harel]

Hi All,

I've been around BT forum for a while (actually since 2009, but only started taking active part recently), as well as other quantitative forums (such as Wilmott), and one thing that I'm missing in BT is the market practice side of Risk Management. I, don't, by all mean, suggest that David and BT team do nothing but excellent job preparing for the FRM exam, but I think that bringing up-to-date risk management methods and market practice should add value to FRM-to-be. That is why I decided to contribute some of my research library (that is sourced from leading Investment Banks), as I hope you will find these papers interesting and helpful as I found them.

The papers can be viewed using the below URLs:


http://tinyurl.com/BarcapRisk1
http://tinyurl.com/BarcapRisk2
http://tinyurl.com/BarcapRisk3
http://tinyurl.com/BarcapRisk4
http://tinyurl.com/BarcapRisk5
http://tinyurl.com/BarcapRisk6

 

[Harel]

Hi,

I've been doing some reading over the weekend and I came across a very hot topic that I'm uable to figure out the right answer for: Should the US gov. fail to raise the debt ceiling and as a result the rating agencies downgrade the TSY into D (from a perfect AAA), what will be the effect on the banks' tier1 capital and adjustments made to the risk-weighted assets?

As the US TSY is considered to be a risk-free asset, and assign a risk-weight of 0, and is the core capital of the vast majority of the money market funds (pension funds, life insurance,etc...), a downgrade of the TSY to D should be followed by a tsumani-like sell-off.

Will it be Lehman all over again? should we all buy mountains of gold?

 

[AG]

@Harel, A hot topic indeed.... Could you please paste a link for this article if there is any...

On a different note, most big banks operate well above the required minimum capital ratio of 8% of RWA (around 12%). The extra 4% should be able to take the hit.... For banks which are highly leveraged, I feel bad since they wont have the extra 4% to take the hit....

Secondly, a downgrade to D directly is unlikely, since US has not defaulted yet. Most of the chinese debt (a significant portion of US external debt) will not be callable till a long time. So, US has some time to react. And as far as US is concerned, they can always raise the tax. So I'd say, a downgrade is possible but may be to an A- or at the worst to a BBB-.

From a short term we are safe. And given this time, I think banks will be able to liquidate their assets without creating a price influence.

AG

 

[Harel]

AG,

Thanks for your insights. Please see the Credit Suisse rates weekly. They suggest that a case of a default is a long shot, but in case of a default Lehman is going to be a walk in the park compared to the magnitude of the ripple effect

http://www.scribd.com/doc/60243186