Banks warned over ‘criminal negligence’ in disregarding liquidity
The single biggest lesson risk managers can draw from the financial crisis is the critical importance of liquidity, said BlackRock’s chief risk officer, Bennett Golub, at the Risk USA conference in New York in October.
For financial firms, he equates the need to keep tabs on liquidity to the need for hospitals to maintain a power source for kidney dialysis machines. Failing to do so is “criminal negligence”, he says. “That isn’t to say there isn’t necessarily going to be that risk, but you need to think about it a whole lot.”
Liquidity is also pertinent when it comes to complex assets. Even when institutions have the financial wizardry to analyse and invest in these products, the liquidity of complex assets can easily break down, says Golub. During the crisis, there were many situations where companies with analytical know-how should have been investing aggressively in mortgage-backed securities, for instance. But those in a position to invest “had no capital and were clinging onto their lives for their jobs,” he says.
Elsewhere, the crisis has demonstrated that investors in securitised products need to go further than quantitative modelling techniques, Golub asserts. When using such models, firms need to be aware that data could be imperfect, incomplete or fraudulent.
Golub says market ructions have also brought a new type of risk to the fore – so-called policy risk. This is demonstrated by the rebound in markets for securitisations that are being supported by government programmes, he says. “There aren’t many quants that have a good idea of what goes on in Washington, but if you want to be an effective risk manager it’s very important.”
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Risk management
Industry urges focus on initial margin instead of intraday VM
CPMI-Iosco says scheduled variation margin is better than ad hoc calls by clearing houses
Consortium backs BGC’s effort to challenge CME
Banks and market-makers – including BofA, Citi, Goldman, Jump and Tower – will have a 26% stake in FMX
Revealed: the three EU banks applying for IMA approval
BNP Paribas, Deutsche Bank and Intesa Sanpaolo ask ECB to use internal models for FRTB
FICC takes flak over Treasury clearing proposal
Latest plans would still allow members to bundle clearing and execution – and would fail to boost clearing capacity, critics say
Buy side would welcome more guidance on managing margin calls
FSB report calls for regulators to review existing standards for non-bank liquidity management
Japanese megabanks shun internal models as FRTB bites
Isda AGM: All in-scope banks opt for standardised approach to market risk; Nomura eyes IMA in 2025
Benchmark switch leaves hedging headache for Philippine banks
If interest rates are cut before new benchmark docs are ready, banks face possible NII squeeze
Op risk data: Tech glitch gives customers unlimited funds
Also: Payback for slow Paycheck Protection payouts; SEC hits out at AI washing. Data by ORX News