Blog Week in Risk (ending Jan 1st)

David Harper CFA FRM

David Harper CFA FRM

David Harper CFA FRM
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Bank and banking
  • Deutsche Bank Flew and Fell. Some Paid a High Price. http://www.nytimes.com/2016/12/30/b...ank-flew-and-fell-some-paid-a-high-price.html “Deutsche has been a primary offender in two of the biggest banking scandals of the past decade: promoting toxic mortgages to unwitting investors and manipulating for profit the main lending rate for banks in London [LIBOR]. In the process, it has agreed to pay over $9 billion in fines and consumer relief … Mr. Cryan [the current CEO] has made it clear that his Deutsche Bank will be markedly different from Mr. Jain’s. Since taking over last year, Mr. Cryan has preached simplicity, less risk, better internal controls and reduced reliance on derivatives.”
  • Halcyon days over for investment banks (Today’s landscape is almost unrecognisable from what existed before the crisis) https://www.ft.com/content/70dceb2e-c6a3-11e6-9043-7e34c07b46ef “FT research shows that in 2007, the world’s 13 biggest investment banks by revenue dedicated two-thirds of their assets to their investment banking activity. Now investment banks have less than half group-wide assets, and the proportion will fall further once banks complete promised cuts.”
Political and regulatory risk, including systemic risk (including BIS)
International
  • Re-Energized Dollar Looms Over the Rest of the World http://www.wsj.com/articles/re-energized-dollar-looms-over-the-rest-of-the-world-1483272003 “Most analysts expect the U.S. currency to strengthen in 2017, extending a gain that has boosted the value of the dollar by more than one-third since the U.S. credit downgrade in 2011. That expectation is mostly because a strengthening economy appears likely to enable the Federal Reserve to enact its plan for multiple rate increases in 2017. Higher rates make it more attractive to hold dollar-denominated assets, attracting money into the U.S … In emerging markets, sustained dollar strength could undercut prices for oil and other dollar-denominated commodities, pressuring developing economies that export raw materials. Emerging-market companies and governments that have borrowed heavily in the U.S. currency will also find their debt more difficult to service.”
  • Dollar’s Rise Threatens Manufacturing Recovery http://www.wsj.com/articles/dollars-rise-threatens-manufacturing-recovery-1482760823 “A strengthening dollar increases the currency’s purchasing power: If imports are cheaper, U.S. consumers would have more money to spend. That in turn could boost retail sales, a key driver of economic growth, and engender more confidence in the U.S. overall. However, while good for U.S. consumers and companies that purchase components abroad, the dollar’s rise promises to hit U.S. manufacturers reliant on sales in overseas markets.”
  • Into the Unknown (PIMCO assesses three global economic scenarios for 2017) https://global.pimco.com/insights/economic-and-market-commentary/cyclical-outlook/into-the-unknown “The only certainty in our view is that the tails of the distribution of potential macro outcomes have become fatter. Left-tail risks are defined by rising debt, monetary policy exhaustion and the populism-powered transition from globalization to de-globalization. By contrast, right-tail opportunities may emerge from potential deregulation, awakening animal spirits and the accelerating transition from exhausted monetary to growth-supportive fiscal policies.”
  • The Fed Puts China in a Bind https://www.bloomberg.com/view/articles/2016-12-20/the-fed-puts-china-in-a-bind “No country can simultaneously sustain a pegged exchange rate, a sovereign monetary policy and free capital flows. At some point, policy makers must make a trade-off.”
Case Studies and Companies, including Strategic or Reputational
  • Law Firms’ Accounts Pose Money-Laundering Risk (Hundreds of millions of dollars allegedly siphoned from Malaysian state fund 1MDB passed through firms’ pooled accounts in U.S., prosecutors say) http://www.wsj.com/articles/law-firms-accounts-pose-money-laundering-risk-1482765003 “Law firms lump together client money they are holding for short periods, such as while real-estate sales are pending, into pooled bank accounts, and the law firms face no requirement to disclose whose cash is in the accounts. Banks say they generally see only a law firm’s name. Money often stays in the accounts for only a few days or weeks. At the request of law firms’ clients, funds can be sent from the accounts to other parties, with scant transparency. While banks and other firms that move money across borders face heavy pressure to alert regulators to suspicious activity, U.S. law firms protect the confidentiality of their pooled accounts in the name of attorney-client privilege.”
  • Authorities Allege $1 Billion Fraud at Platinum Partners (Founder Mark Nordlicht and six others charged with defrauding more than 600 investors) http://www.wsj.com/articles/platinu...ed-with-1-billion-securities-fraud-1482154926 ”Platinum’s collapse caps a stunning fall for a hedge fund that had once boasted of one of the most superlative track records in the hedge-fund world. Its main funds reported no down years and virtually no down months. Mr. Madoff had made similar claims.”
  • The World’s Largest Hedge Fund Is Building an Algorithmic Model From its Employees’ Brains (Bridgewater wants day-to-day management—hiring, firing, decision-making—to be guided by software that doles out instructions) http://www.wsj.com/articles/the-wor...ithmic-model-of-its-founders-brain-1482423694
Technology, including FinTech and Cybersecurity
Exams, Financial Associations (GARP, FRM, CFA Institute) and Careers, including CRO Interviews
Books and Courses (including Journal/SSRN)
Data science (primarily R), including Alternative Data
Risk Foundations (FRM P1.T1)
Quantitative Analysis (FRM P1.T2)
Financial Markets and Products, including Interest Rates, Commodity Risk, and Foreign Exchange (FX) (FRM P1.T3)
  • Fed expectations throw investors a “curve” (PIMCO) https://www.blackrockblog.com/2016/12/28/fed-expectations-throw-curve/ “In plain language, the yield curve is simply a line that connects the yield of bonds that have different maturity dates. Investors of all sizes use the yield curve to form their opinions on the health of the economy and on the extent of inflation. A steepening yield curve (when the difference between short-term and long-term bond yields increases) is generally seen as favorable for the economy, suggesting healthier growth … As we had seen following the BoJ announcement on September 24, the movement away from signaling ever increasing amounts of QE and negative interest rate policy (NIRP) means a better environment for bank stocks, as steeper yield curves imply better margins and higher profits for banks. That shift highlights the possibility of greater bank lending: Steeper curves and shifting the outlook from ever flatter yield curves (with their attendant declining profits for bank lending) to steeper curves implies greater incentives to make loans. And greater lending activity implies faster economic activity and higher inflation.”
  • Most Traded Currencies in 2016 http://www.visualcapitalist.com/most-traded-currencies-2016/
  • Commodity Futures Investing: Complex and Unique http://blog.alphaarchitect.com/2016/12/21/commodity-investing-is-complex-and-volatile-but-unique/ Cost of carry model: “Futures price reflects three components set forth in the equation below (outlined in detail below): F = Sp*(1+r+s-c)” Paper referenced by AQR Capital: http://trtl.bz/2iyGhZF
Investment risk, including Pensions (FRM P1.T8)
  • Hedge funds fees take a trim (Traditional ‘2 and 20’ fees are becoming outdated as managers seek to keep investors happy) https://www.ft.com/content/ab1ce98e-c5da-11e6-9043-7e34c07b46ef “Managers are offering discounts by using a scale of fees based on assets under management or time spent invested, so when assets rise or a certain amount of time passes, the early investors pay less, according to Barclays’ prime services group. There are also longer performance fee crystallisation periods for funds with longer investment time horizons, and hurdles that place a threshold on incentive fees. Some are also charging different levels of performance fees based on how big a return they made; granting discounts where existing investors can add more capital to a strategy during a down period at a reduced rate, and offering reduced fees if investors agree to lock up their capital for longer or invest a larger chunk of money. According to Barclays, two-thirds of funds offer a fee discount of some kind.” And related: Hedge Fund Math: Heads We Win, Tails You Lose http://www.nytimes.com/2016/12/22/business/hedge-fund-fees-returns.html
  • Calpers Cuts Investment Targets, Increasing Strain on Municipalities http://www.nytimes.com/2016/12/21/business/dealbook/california-calpers-pension-fund-investment.html “Under all other circumstances, Calpers currently assumes that its investment portfolio will return an average of 7.5 percent a year over the long term, and bills its member governments accordingly. Its trustees agreed Wednesday to reduce that to 7 percent, phasing in the reduction over the next three years.”
Current issues (FRM P2.T9)
  • Global House Prices: Time to Worry Again? https://blog-imfdirect.imf.org/2016/12/08/global-house-prices-time-to-worry-again/ Although house price index is almost back to its pre-crisis level they argue this time is different “First, unlike the boom of the 2000s, the current boom in house prices is not synchronized across countries. And within countries, the boom is often restricted to one or a few cities. In many cases, the booms are not being driven by strong credit growth: some house price increases, particularly at the city level, are due to supply constraints. Second, countries are now more active in the use of macroprudential policies to tame housing booms. As our former Deputy Managing Director Min Zhu declared: “The era of benign neglect of house price booms is over.”
 
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