Risk Management of Financial Institutions after the Financial

  • Slides: 10
Download presentation
Risk Management of Financial Institutions after the Financial Tsunami---Current Reactions Hsien-hsing Liao Department of

Risk Management of Financial Institutions after the Financial Tsunami---Current Reactions Hsien-hsing Liao Department of Finance National Taiwan University 1

Contents The financial failure 2007 -? Basel III Some points from “NYU Stern Working

Contents The financial failure 2007 -? Basel III Some points from “NYU Stern Working Group on Financial Reform” 2

Understanding financial failure (G 20, June 2010, Toronto ) • Originate-to-distribute model: complex derivatives,

Understanding financial failure (G 20, June 2010, Toronto ) • Originate-to-distribute model: complex derivatives, but simple maturity mismatches • Leverage and deleveraging cycle (Minsky-moment) • Contagion cycle: financial real political • Contagion: liquidity solvency Amplifiers • Endogenous risk (behavioural) • Counterparty risks • Off-balance sheet, contingent lines - paradox of trust • Excess reliance on ‘wholesale’ finance

Broad principles underlying reform and regulatory change (G 20, June 2010, Toronto ) •

Broad principles underlying reform and regulatory change (G 20, June 2010, Toronto ) • Undercapitalized financial system • Limits of micro-prudential (individual) rationality in regulation, supervision • Limit size, complexity, in some cases interconnectivity of financial institutions. • Risk allocation • Ex-ante incentives (bail-in) vs. ex-post (bail-out, levy, taxes) • Continuous markets (risk pricing, market clearing, basic transformation functions – ‘market-maker of last resort’)

Summary: status of core issues High conceptual clarity Capital adequacy; capital standards ; trading

Summary: status of core issues High conceptual clarity Capital adequacy; capital standards ; trading book High/reasonable prospect (with changes; leverage ratios; liquidity ratios; modifications) countercyclical buffers High level consensus Reasonable conceptual clarity Reasonable prospect (in some jurisdictions more than others) Some consensus Charges on SIFI; other macro-prudential systemic risk measures – FAT, FSC (IMF); Financial Crisis Responsibility (FCR) fee (Obama-TARP levy 0. 15% of LFI liabilities); market stabilization fund (Germany, US); bonus/payroll taxes (UK, France) Resolution plans –living wills; Volcker-rule Basic concept, low clarity Uncertain prospects No consensus Cross-border resolution regime- its link with national measures (punitive charges, stability funds); bank-tax/levy; FTT/CTT

Basel III • The Basel Committee on Banking Supervision reached board “Basel III” agreement

Basel III • The Basel Committee on Banking Supervision reached board “Basel III” agreement on 12 Sep. 2010 • “Basel III” tightens the definition of regulatory capital; • increases the min. requirement of Tier 1 Capital; • establishes conservation / countercyclical capital buffers; • introduces a leverage ratio; • a new liquidity coverage ratio and a net stable 6

Basel III Proposed Capital Reforms • Quality, consistency & transparency of • • the

Basel III Proposed Capital Reforms • Quality, consistency & transparency of • • the capital base. Enhance risk coverage. Introduce a leverage ratio. Deal with Pro-cyclicality. Address systemic risk & interconnectedness.

NYU Stern Working Group on Financial Reform Financial Architecture If the financial system continues

NYU Stern Working Group on Financial Reform Financial Architecture If the financial system continues to be dominated by institutions with high levels of systemic risk: n The creation of a new systemic risk regulator is necessary n This new regulator would supervise the growing cohort of financial conglomerates n institutions are encouraged to follow more specialized business strategies. 8

Systematic Risk • • • Measuring Systemic Risk Managing Systemic Risk Taxing Too-Big-to-Fail Institutions

Systematic Risk • • • Measuring Systemic Risk Managing Systemic Risk Taxing Too-Big-to-Fail Institutions Capital and Liquidity Requirements Is Breaking Up the Big Financial Companies a Good Idea? Size or activities • Contingent Capital • Financial Institutions Subject to the Bankruptcy Code 9

Markets and Institutions Securtization reforms Securitization created serious systemic problems that played a major

Markets and Institutions Securtization reforms Securitization created serious systemic problems that played a major role in the financial crisis. n Transparency n More Regulations vs. Cost Efficiency Credit Agencies central players in the subprime residential mortgage crisis 10

Financial Institutions By Ben Quick Financial Institutions FinancialFinancial Institutions By Ben Quick Financial Institutions Financial
Risk Management Introduction Risk Management Fundamentals Risk ManagementRisk Management Introduction Risk Management Fundamentals Risk Management
Risk Management RISK MANAGEMENT Risk Management RM ApplicationRisk Management RISK MANAGEMENT Risk Management RM Application
Risk Management Risk Management RISK MANAGEMENT MANUAL ROTARYRisk Management Risk Management RISK MANAGEMENT MANUAL ROTARY
Risk Management RISK MANAGEMENT RM95 2 Risk ManagementRisk Management RISK MANAGEMENT RM95 2 Risk Management
Depository Institutions Depository Institutions Include n Institutions whichDepository Institutions Depository Institutions Include n Institutions which
Social Institutions GuleNayab Social Institutions Social institutions areSocial Institutions GuleNayab Social Institutions Social institutions are
FINANCIAL RISK MANAGEMENT AUDITING AT FINANCIAL RISK MANAGEMENTFINANCIAL RISK MANAGEMENT AUDITING AT FINANCIAL RISK MANAGEMENT
WHY INVEST IN FINANCIAL INSTITUTIONS HOW FINANCIAL INSTITUTIONSWHY INVEST IN FINANCIAL INSTITUTIONS HOW FINANCIAL INSTITUTIONS