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It may well be time to pull out that pandemic plan and at least give it a good look over, ensure key staff are aware of what they should do etc. etc. etc. Also take a good look at how your systems may cope with something like 50 to 75% (or more) of your people working from home – which should be a part of any such plan.
The swine influenza outbreak may, as most of these do, turn out to be a tragic event with some loss of life but not one on the scale of 1918. All the same it would be better to have everything in order.
Points to look at:
- Website readiness – make sure it can be updated with the latest information on a regular basis. As BWA found out last time they had a major problem it was the lack of information that really annoyed people.
- Media plan – ditto. Make sure you have the numbers for relevant journalists handy.
- Staff planning – get as many of them vaccinated as possible and have some masks on hand at the branches. They may not be needed, but what is a $5 mask compared to your staff being sick? Do the staff that are not immediately needed know that they are the ones who will not be immediately needed and may stay at home?
- Systems – with most admin staff at home, will your systems cope? Are there enough laptops ready for all the ones you really need?
You did have all this ready a year or so ago, so it should not take much to make sure it is all there. You did have it ready, didn’t you?
Jennifer (see the previous post) pointed me to this presentation to the IAA’s annual conference by Dr. Mark Lawrence. While it breaks many of the rules I normally set for a group of slides it is one of the presentations I would like to have been at.
While I do not agree with all of it (he thinks that fair value accounting is an issue, for example), it makes a number of very good points – for example:
Regulators should support the private sector’s efforts to improve transparency, with particular reference to harmonization of disclosure requirements among different jurisdictions. The official sector should work closely with industry and market participants to improve market understanding of Pillar 3 disclosure content. Disclosure requirements should be based on a risk-and principles-based approach to qualitative as well as quantitative information
In the view of many, culture is the single most important determinant of risk management effectiveness
Risk Managers concerns [are] often pushed aside [ask HBOS about this one]…
Capital models were originally created for important business purposes, and won’t go away …
Therefore, users (and supervisors) must understand very well the weaknesses and limitations of the these models:
- exactly what is measured, and what is not
- exactly what the models can and cannot be relied upon for
- when they work (i.e., under what conditions) & when they don’t
It is worth at least a read. The point about understanding your capital models is crucial. They are not and will never be the be-all and end-all of risk management. Like any model they are only as good as the common sense put behind them.
This is a guest post by Jennifer Lang. It provides the background behind a presentation on economic capital which is being made to the Institute of Actuaries of Australia’s Biennial Convention
How and why should we measure it?
Economic capital means different things to different people. But for this presentation, the purpose of economic capital is to assist companies in appropriately measuring the rate of return a company is getting in proportion to the risk it is taking.
Economic capital is not:
- Regulatory capital – regulatory capital is the amount of capital a regulator has determined an institution needs to hold, but is generally not as specific to the institution as economic capital would be. The capital for particular risks would be calculated more broadly, and the definition of risk would be a systemic one, rather than an institutional one.
- Value of the organisation – the value of an organisation (in the long term) should be the discounted value of future distributable profits. There is no reason for economic capital (which is a measure of extreme risk) and discounted value of future profits to have any defined relationship. Companies should, however, be earning adequate return on the capital they hold – the purpose of economic capital is to help them work out what that return should be.
- A capital resource – economic capital measures a capital requirement, not how much capital a company might have available. Net assets (below) are a capital resource
In working out what to do with economic capital, the capital
resources available to the company can include net assets, future value
of profits, and some other assets which may not be recognised for
accounting purposes. On the flip side, some accounting assets (such as
the goodwill paid for a recent acquisition) may be valueless in an
economic capital scenario.
Read the rest of this entry »
I was going over an old(ish) copy of the Economist this morning and I came across an article that deserves more coverage.
The central point is easy to state – if you intend to do a spot of money laundering or tax evasion you do not need to go to somewhere sunny or somewhere in a recognised tax haven. It is more than easy enough to do in the US or the UK.
The most egregious examples of banking secrecy, money laundering and tax fraud are found not in remote alpine valleys or on sunny tropical isles but in the backyards of the world’s biggest economies…
Take Nevada, for example. Its official website touts its “limited reporting and disclosure requirements” and a speedy one-hour incorporation service. Nevada does not ask for the names of company shareholders, nor does it routinely share the little information it has with the federal government.
This makes it fairly obvious that much of the finger pointing at the usual tax havens is just to cover up the simple fact that the bigger economies are doing even less.
It is also a good warning to others working with US and UK registered corporations – just because they come from an OECD country it does not remove, or even reduce, your obligations to check that the funds you are receiving or paying are from legitimate sources.
A friend of mine is trying to get an credit card merchant account so that a new business he is starting is able to accept credit card payments. The only slightly non-standard parts of it are that he would like to be able to keep forex receipts in the foreign currency to reduce the forex risks (some of his payments will be in USD) and that he would like to be able to do recurring billing.
Personally, I do not think either of these should be a difficult thing, but I have run out of suggestions and I do not work in the credit card area much these days.
If you can think of a way to do it, please either comment here with a suggestion (which I will forward on), or head over to Troppo where Jacques would be happy to hear from you.
By the sound of it he is now also prepared to consider going overseas to get such an account – incorporation in Delaware has been suggested. Any other ideas would be welcome.
If you want to sound off or empathise I think that he would also be happy to here those as well.
Bank capital allocation is normally a pretty dry subject – and that is to people who work in the area. To the rest of you it must be sleep inducing. That is, until you consider the real effects that it can have.
This is a follow on piece to yesterday’s article.
On a macro level, of course, the differences in the capital charges (between Economic, Regulatory and Total) drive some really odd behaviour. The effects on an unregulated institution (or one without effective capital regulations) are that, in the absence of regulatory restrictions, they can hold assets with less of a capital charge than a bank. This means that, if the bank lends the money out in the first place, the loan is worth more to an unregulated institution than to a bank. Selling the loan then means that both parties make money on the deal. It also means that it is worth trying to get the home loan into a different regulatory capital category – say as a traded instrument rather than a loan.
Banks therefore bundle(d) these up into corporate vehicles (securitisations) and tradeable instruments (CDOs etc.). If the bank can get the loans off their books then they can make the money from the initial fees from lending, selling the loans and also from managing the loans once they are off the bank’s balance sheet.
If the loan is sold and the bank retains little or no credit risk (i.e. if the loan goes bad then the bank does not have to pay) then the incentives are simple – write as many loans as possible regardless of the credit risk provided you can then sell them. If housing prices go up then there is no problem at all – everyone (including the borrower) stands to make money. The bank gets a fee for originating the loan, the purchaser of the loan makes money off the interest and, if the loan goes bad gets the remaining funds from the sale of the house and the borrower gets to live in the house and may well be given some money at the end when it is sold.
If prices go down, though, it is another story. The originating bank still makes money, the borrower (in the US at least due to the without recourse lending) gets to live in the house until foreclosure but the loan purchaser gets stuck with any losses, as has happened in the US over the last year.
The point here is that the excess and disproportionate requirements of regulatory capital is one of the main things driving this. People will always try to make money and should be (justly) condemned for doing so when it involves fraud or negligence, but the system itself should not create the incentives in the first place.
Creating a CDO or securitisation costs money. There are legitimate reasons for them to exist (some banks are better at lending than borrowing and some investors want to be able to lend specifically for housing for example), but having them drive adverse lending behaviour can cost vast amounts more money. Reducing the incentives for them to exist means fixing the regulatory capital weights.
Until that is done merely requiring more capital in banks will increase, not reduce, the problem.
I was asked yesterday about capital charging – and I started talking about transfer pricing. Whoops.
Without going into a full description of banking capital, I would like to set out a few basics on capital charging, my philosophy on how it should be done and (tomorrow) some of the effects of this on the current system.
The first decision you need to make is whether to use economic,
regulatory or total capital. In deciding the level of total capital, it
should be above (by a certain margin) whichever of economic or
regulatory is the higher. If we assume that regulatory capital is the
higher (a fairly safe assumption) you get the following:
Total Capital > Regulatory Capital > Economic Capital
The reason for this fairly simple – if you are operating below your regulatory capital then the regulators will (or should under the law) insist that you increase your capital level or they will move in and shut you down. Regulators normally insist on more capital being held than is conventionally prudent, and the economic capital value is what you would choose to hold if you were being conventionally prudent (i.e. within your risk appetite).
The important question when internally charging for capital is which of these to use as the correct value for charging? Read the rest of this entry »
While the process of restructuring the finance industries continues, I thought a little bit of a look at some other industries attempting the same process may well be in order. The US car industry – that one that occasionally produces a car or two, but it mainly concerned with pensions and health benefits – is a good example. As this article in the New York Times (thanks, Catallaxy) has pointed out, it has been restructuring for about 30 years or so.
The firms in it, being “too big to fail”, continue to sit over the remains of their once proud brand names. The government keeps trying to send them a little bit more help to get them through the phase they are going through, but never actually achieving anything like a lasting solution to get them back into a viable position.
The pity is that I see this as a possible future for the banking industry as well. Fortunately there are a lot more banks out there than just the three (although Australia comes close with four) but the rest of the analogy holds reasonably true. The government attempts to hold the system together seem to be doomed to the perpetual twilight of the Japanese banking system a la 1990 – with the US legislators trying to help solve the problems with accounting standards changes rather than actually looking at the real problems – a lack of either solvency or liquidity.
As the Japanese found out, that sort of jiggery-pokery with the contents of financial reports – making them less clear – just leads to one thing: a distrust of the reports, leading on to a lack of investor confidence.
Surely this must be avoided. To me the only solution is the one that was selectively applied up front – weak banks should be allowed to fail. The US has a good system to allow this to happen – Chapter 11 allows for a restructuring and recapitalisation from private sources while continuing to trade. Bankruptcy, in the event Chapter 11 does not work, allows for the assets to be realised, creditors paid out and the husk of the bank to be put down, rather than being zombies hanging around, soaking up literally trillions of dollars from productive uses.
It would be painful while it is going on, no doubt, but an extended period of restructuring, as per the US car industry or Japanese financial sector, would surely be worse in the long term. It would also serve as a timely reminder that no-one, anywhere, should be too big to fail. That simple fact tends to concentrate minds wonderfully.