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Unified Financial Analysis Risk & Finance Lab

Unified Financial Analysis Risk & Finance Lab. Chapter 19: The new frontier Willi Brammertz / Ioannis Akkizidis. What the financial crisis revealed. Government is owner of last resort Regulation failed New regulation is needed. The evolution of regulation “at-a-glance”.

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Unified Financial Analysis Risk & Finance Lab

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  1. Unified Financial Analysis Risk & Finance Lab Chapter 19: The new frontier Willi Brammertz / Ioannis Akkizidis

  2. What the financial crisis revealed • Government is owner of last resort • Regulation failed • New regulation is needed

  3. The evolution of regulation “at-a-glance” The Savings and Loans Crisis created the greatest banking collapse since the Great Depression of 1929. Dodd-Frank/OFR Convergence of risk and reg 2010 Savings & Loans (S&L) crisis in the US Early 80s Subprime mortgage crisis 2007-2008 Thrift Bulletin 13 1989 Balance sheet ratio-based regulation Late 19th / early 20th Century Basel I launched (Cook) 1988 Basel II launched 2004 FSA enforce liquidity regime 2009 FSB Basel III Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision Basel I is the round of deliberations by central bankers from around the world

  4. CSFI/PWC Banking Banana Skin ReportRanking of „regulatory risk“

  5. More or better regulation?

  6. Smart regulation • Despite the fact, that the financial sector is among the most important public sectors, it is probably the most dumbly regulated of all • We do not need more ... • but smarter regulation • It is possible to increase the quality of regulation x-fold and reduce its cost

  7. Regulation: The new tasks • The rise of systemic risk: • From single bank to industry wide view • Simultaneous control • The importance of the stress tests: • Regulators took the role traditionally of risk managers • Across the board in line with the idea of systemic risk • From backward looking custodians of some balance sheet ratios to forward looking global risk managers

  8. New regulationAnswering to the new task • Single contract level • Standards, organized along • LEI’s • CT‘s

  9. It’s all about standardsGood examples

  10. The differenceFood has a language, finance not

  11. Setting financial standards • Bodies • Office of Financial Research (OFR) USA • Financial Stability Board (FSB) Europe • Tasks: Standardization of • Legal Entity Identifyer (LEI) • Contract Types

  12. Dimensions of the project

  13. Not only regulators will profit ....... .......

  14. Financial Contracts and Capital Charges Capital Charge Low High This constitutes a capital charge for model risk!

  15. Benefits for all Market Participants Christopher Culp, “Lecture Notes, ” The University of Chicago Graduate School of Business (Autumn 2008).

  16. Beginnings • LEI • ACTUS www.projectactus.org

  17. Benefits for banks IFRS 39 α, β, Γ Operational risk Historic simulation Risk management CVaR Budgeting Monte Carlo Basel II FTP CAD VaR ALM Controlling Balance sheet planning Back testing Profitability Liquidity risk Stress testing Treasury Solvency II Credit risk Basel 96 Dynamic simulation Activity based costing

  18. THANK YOU

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