Something for the weekend, sir?: Difference between revisions

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 Banks crewmour sophisticated comma as did bank regulation, and different capital ratio's might be applied to different trading and banking books based on this actuarial assessment of the embedded risk.
-==Rokos short primer==
-... Punting on interest rates
-==How do you find the time bombs in your balance sheet==
+But how to manage, actuarily, that embedded risk? How, indeed, to know exactly what it was? Hence the rise of the rating agency: independent Financial experts applying independent models to portfolios and calculating probabilities of default comma from which the rating agencies could derive ratings. Rating methods are of course opaque and in scrutable, but the general idea was that a triple A instrument was unimpeciably safe, and therefore would attract a lower or even zero capital charge)
-The JC found to his surprise and delight that his big sister reads the newsletter — normally no-one in the Contrarian clan pays him the blindest bit of attention — and after his peroration about alternative tier one capital this week she had a question: does ''anyone'' understand the banking system?
-It’s a good question. The level of bank analyst Twitter shade-throwing — and central banker Twitter shade-throwing, for that matter — speaks to weak opinions strongly held.
+The independent private rating agencies gradually became embedded into the US regulatory system such that what mattered comma more than one's internal appreciation of risk, was the rating that could be applied to one's security. Near line back to our mortgage portfolios and say one has a mortgage portfolio of 10,000 properties of which any could, conceivably, default in a given period. Even in a period of extreme stress perhaps 10% would be likely to default no more.
-Is it — maybe, that no-one really knows? That it is this giant organic contraption that does what it will — for that is the whole of the law — and the those who rise to executive position do so by fiat and have as much understanding and control over these infernal machines as a chimpanzee strapped to a rocket?
+But, witch 10%? They're in the Dilemma; they're in the problem. Since I don't know which of my 10,000 mortgages will default, I must apply a 20% capital rating to all of them. If only we could know definitively that a mortgage would not default one could apply a lower capital rating.
-Did the quick succession of chief executives at Credit Suisse really have a clue what was buried in their balance sheet as the successive horrors revealed themselves?
+Needless to say, obviously impossible: one cannot predict the future.
-There is a chain of command question here.
+===Music royalties===
+This same problem of predictability of future income streams applies in many areas of finance. Credit card receivables, automobile loans, and even songwriting royalties.
-Clearly the chief risk officer cannot know the trade-level minutiae of every risk position in the book. For that she must rely upon an army of risk managers, hierarchically organised, to patrol their posts, sending reports to watch commanders, who in turn collate and send theirs to a regional coordinator, who will take the reports of several watch commanders and distil from that a highlights reel to go to the risk steering committee — and so on. That process hass somehow to deduce contextualise and aggregate those individual risk analyses, but at the same time deduce emergent risks from the interaction of those different situations, as well as wider trends and hotspots in the wider market.
+Imagine you are an otherworldly, androgynous, boundary pushing British musician from the 1970s. Buy the 1990s you have behind you 25 error defining albums and about catalogue of music which has defined a generation of which the JC proudly declares membership. People still listen to your music and you have a healthy forward flow of royalty income. But it's in determinate, and it's in the future. Cash in hand is so much better than cash you may or may not be paid in a year's time.
-There has been a trend over decades now towards technology and process to bolster human analysis. In a tacit acknowledgement that perhaps it is too hard for mortal minds. The problem being that technology and process hasn't proved much good either.
+==Rokos short primer==
+... Punting on interest rates
-Part of the problem lies in the nature of catastrophic events. They have an unnerving habit of striking when and where you least expect it: where, QED, in places your telescopes and search beams are ''not'' pointed. The most successful firms on the street (LTCM, Enron) the chairman of the NASDAQ (Bernie Madoff). A sleepy benchmark interest rate-setting process managed by the dear old British Bankers’ Association (LIBOR).  A Family Office running its own money and borrowing in a secured, margined basis (Archegos). Flighty bank depositors (SVB, Signature)
-They also have an unnerving habit of happening very quickly and uncontrollably. They have the characteristic of “normal accidents”, so named by Charles Perrow in his {{Br|Normal Accidents: Living with High-Risk Technologies}}: that is, a distributed system displaying a combination of non-linear, [[complex]] interactions and “[[tight coupling]]", where chain reactions are easy to set off and hard to stop.  In  systems of this kind, Perrow thought catastrophic accidents were not just likely but, from time to time, ''inevitable''. Such unpredictable failures are an intrinsic property of a complex, tightly coupled system, not merely a function of “operator error” that can be blamed on a negligent employee — although be assured, that is how management will be inclined to characterise it if given half a chance.
-History suggests risk managers aren’t very good at this. Our old friend Archegos
-Sidney Dekker’ {{fieldguide}}
-The question has particular urgency for the the executive suite at UBS. who has just taken on the assets and liabilities of Credit Suisse. While they appear on their face to have bagged the steal of the century, Credit Suisse is proven capability of sustaining and think of glee large losses in a short period must have giving them paws for thought. For who is to say that is not another 10 billion dollar loss buried somewhere in that balance sheet?
-Who, in other words, would be chief risk officer of a large financial institution. We know, in the case of silicon valley bank, that the answer to that question happened to be no one.
-Would it be possible, with sufficient acumen tonight to regard the books and records of an institution and be confident that there were no any bombs lying in wait?
-If about even has one, a global chief risk officers job. Must be pretty thankless. Not only is the the size and complexity of a universal bank's balance sheet in itself mind-bogglingly difficult to get a grasp of, but the individual problems that can cause a a meltdown have to particular qualities colon firstly, they tend to come from the place where you least expect it full stop secondly they tend, From a distance, not to look like festering wounds at all all. To the contrary, they often look like exceedingly profitable situations. The Archegos situation is a, cough, prime example.
-So a chief risk officer simply does not have the bandwidth, time, or analytical powers to deduce aggravated risk situations by herself. She must rely on her reporting chain — it might be six layers deep — to surface these risks and bring them to her attention. The chief risk officers job, in essence, is to ensure she has the right systems and controls in place that can identify these situational wrists and escalate them to her.
-===Hindsight is a wonderful thing.===
-This is why we should take the moral dudgeon of regulators, politicians, and why is after the fact financial commentators with a pinch of salt. In hindsight, there is only one path of history. In foresight there are potentially infinite ones. Any prospective analysis of a disaster scenario who is entitled to treat each decision as as a known calculation with a determined outcome. That information is necessarily not available to persons making the decision at the time.
-Who would be credit suisse’s chief risk officer? Who would be ubs right now
-Who would be SVB’s? — trick question! SVB didn’t ''have'' one!
-The Archegos cautionary tale: the individual risk officer might know, but
-How would a chief risk officer ever see that.
-Risk meeting by data
-SME action  where are the risk? Who makes most money etc.
 ==Hammer of the gods==

Something for the weekend, sir?: Difference between revisions

Something for the weekend, sir? (view source)

Revision as of 13:50, 8 April 2023

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