PRMIA Intelligent Risk - July, 2021 by PRMIA Org

INTELLIGENT RISK knowledge for the PRMIA community

PROFESSIONAL RISK MANAGERS’ INTERNATIONAL ASSOCIATION CONTENT EDITORS

INSIDE THIS ISSUE

Steve Lindo

003

Editor introduction

Principal, SRL Advisory Services and Lecturer at Columbia University

004

A tribute in memory of Kalyan Sunderam

Dr. David Veen

006

PRMIA volunteer spotlight - by Adam Lindquist Oleg Lebedev & Rustum Bharucha

009

U.S. economic recovery mirrored in the stock market by Aleksei Kirilov & Valeriy Kirilov

014

Review of the changes in the CVA framework beyond Basel III by Sam Sharma

018

Managing financial risks in (re)insurance in the postpandemic world - by Thomas Weber & Jörg Günther

021

The stock market and COVID-19 by Dr. Maya Katenova

024

Integrating sustainability: the challenges and the emerging risk assessment process by Rajagopal Kannan

029

Microfinance risk and the future - by Adam Lindquist

032

Archegos: a spectacular failure in risk management by Dan diBartolomeo

035

NSFR: final leg of liquidity regulation! by Ashish Deccannawar

039

Perils of ignoring climate risks - by Dr. K. Srinivasa Rao

042

R&D metamorphosis within operations division of the banking industry - by Ashwin Baburaj

044

Chapter spotlight: PRMIA New Delhi

046

Calendar of events

Director, Evaluation Services - IT at Western Governors University

SPECIAL THANKS Thanks to our sponsors, the exclusive content of Intelligent Risk is freely distributed worldwide. If you would like more information about sponsorship opportunities contact sponsorship@prmia.org.

FIND US ON

prmia.org/irisk

002

@prmia

Intelligent Risk - July 2021

editor introduction

Steve Lindo Editor, PRMIA

Dr. David Veen Editor, PRMIA

Nagaraja Kumar Deevi Editor, PRMIA

The July 2021 issue of Intelligent Risk continues to focus on the impact of COVID-19. In the US, at least 56% of the population have received at least one vaccination dose, compared to 22.9% of the global population. A recent Federal Reserve survey found that the economy strengthened further in late May and early June, despite supply-chain bottlenecks that led to price hikes. Overall, the economy is showing signs of recovery and improving, with a few exceptions where vaccinations are not available or widely adopted, and the path to recovery is slow. In response, many organizations are launching hybrid work plans with a blend of flexible in-office and remote work. Against this cautiously improving backdrop, PRMIA’s Sustaining Members contributed a variety of topical articles about economic recovery mirrored in the stock market, managing financial risks in (re)insurance in the post-pandemic world, changes in the CVA framework beyond Basel III, NSFR – the final leg of liquidity regulation, the emerging environmental risk assessment process for sustainability, failure of Archegos, stock markets and pandemia, the perils of ignoring climate risk, and the potential for dedicated R&D in banking operations. We thank this issue’s authors for their thoughtful contributions and extend our wishes for all to be cautious and follow all health safety guidelines. We hope that PRMIA’s members will find the articles published in this issue interesting and enjoy reading them as much as we did reviewing and editing them. We would like to end with a special mention of the valuable contributions to PRMIA’s body of knowledge by our long-time volunteer Kalyan Sunderam, who passed away recently. Our deepest condolences and prayers go to his family and dear ones as they mourn his loss.

Intelligent Risk - July 2021

003

a tribute in memory of Kalyan Sunderam We are saddened to hear the news of the death of Kalyan Sunderam, PRM, CFA, and PRMIA Education Committee chair. Our thoughts are with his family and colleagues.

April 4, 1949 - June 20, 2021

Kalyan was a long-time supporter and member leader within the PRMIA membership network. He helped to develop and launch the Professional Risk Manager credentialing program and supported its continual updates over the years. During his time serving the membership at PRMIA, Kalyan brought integrity and validity to the programs for financial risk managers around the globe. His strong leadership, influence, and expertise will be missed.

”

Kalyan has been the main source of continuity in the Education Committee across many cycles. I had the pleasure of working with Kalyan on the Education Committee when I served as the Chair as a newcomer. Kalyan’s dedication to PRMIA, passion about the risk management profession, and his adherence to quality of our educational and examination material helped tremendously and was contagious. He set a great example for other Education Committee members by organizing and leading a subcommittee reviewing all our test bank that led to restoring our confidence and revitalize the program. Yet, he was always very humble and listened to everyone carefully and asked the most relevant but hard to answer questions without any hesitation. It is truly a loss to PRMIA and our industry. He will be truly missed, but he has made his impact already. Ron D’Vari, past PRMIA Education Committee chair, Chief Executive Officer/Co-Founder, NewOak Capital LLC

004

Intelligent Risk - July 2021

” ”

Kalyan consistently gave his time and energy to education and standards in risk management. His dedication and commitment were an example to us all – he was the consummate risk professional. Thank you Kalyan for your many years of service on PRMIA’s Education Committee. Jonathan Howitt, past PRMIA Board member and Education Committee chair, Chief Risk Officer, World Food Programme

The first time I met Kalyan was in 2017 in London in the meeting to revise the materials in the PRM exam. At that meeting, Kalyan encouraged us to devote more time in the risk community. He was a warm-hearted, intelligent, and kind person. At this moment, best wishes to his family. All of us will still follow his step to support and expand the risk community. Albert Qi Lu, PRMIA Education Committee member, Independent Approver, LujiaZui Trust

”

Kalyan was a long-time member leader for PRMIA, supporting the mission to promote the profession around the world. He was always a steadfast supporter of PRMIA and the Education Committee. Mary Rehm, Director of Learning and Development, PRMIA

Intelligent Risk - July 2021

005

PRMIA volunteer spotlight Oleg Lebedev & Rustum Bharucha

by Adam Lindquist Former US President John F. Kennedy once stated, “Leadership and Learning are indispensable to each other.” The London Chapter of PRMIA has enjoyed a long legacy of exceptional volunteers and volunteer leaders who motivate each other and accomplish much. Two great examples are Oleg Lebedev and Rustum Bharucha, Co-Chairs and Regional Directors of the PRMIA London Chapter. I was fortunate to connect with both and discuss their leadership style and why London has such an effective chapter with a strong member following.

Adam

Gentlemen, I would like to ask you as leaders, what makes the London Chapter unique?

Oleg We have a good mix of people willing to put their time, skills, network, and creativity for the good of the organization. Although we have a friendly and supportive environment, we do not shy from tackling issues head on if things are not going as expected. We are also happy to try new ways of working, which served us well in the challenging pandemic year of 2020. Rustum The London Chapter is one of the most successful within the PRMIA network, and this success is attributed to a strong team of volunteers within the chapter who come together to help drive collaboration though innovation – especially during the pandemic when most chapters stopped doing events the London Chapter replaced their in-person events to virtual events and doubled the events on their calendar.

Adam

How did you decide you wanted to volunteer with PRMIA?

Oleg Having worked in risk management in banking for many years, it was a natural choice to give something back to the risk community. PRMIA, a volunteer-led professional international association with noble objectives of promoting risk management profession, ticked all the boxes. Rustum Volunteering for PRMIA truly gave me an opportunity to give back to the industry I serve and work within. Outside of my professional network I also volunteer as a local Scout Leader, and the role of volunteers is key to the success of any association or charity.

006

Intelligent Risk - July 2021

Adam

What have you learned as a volunteer about others?

Oleg There are two types of people: talkers and walkers. It is great if you can walk the talk or simply walk without talking, but it does not do anyone any good if you simply talk without ever walking. Nothing gets done if we simply talk! Rustum

It’s more to do with motivation – finding out what motivates an individual and their interests. If you can give volunteers an opportunity that meets their expectations, they will certainly help contribute towards the overall objectives of the wider group, in this case the London Chapter.

Adam

What do you look for when recruiting others?

Oleg We look for three things: time commitment, sufficient level of seniority so that the voice of PRMIA can be heard, and last but not least, clarity on the expectations from both sides. In fact, we have a set of minimum expectations that we share with every prospective volunteer, which also serves as a basis for selfassessment at the end of each year. Rustum

Finding out what potential volunteers’ expectations are and what motivates them is key to recruiting the right person. Volunteering is a two-way street and would not suit an individual who wants to get more out of PRMIA than what they can offer.

Adam

What is the secret to being a good volunteer?

Oleg There is no secret. If you are prepared to put the time in, be truthful to yourself and others on what you can and cannot do, and respect others and not be afraid to hold them and yourself to account, you will do well for yourself and the organization you volunteer for. Rustum

The London Chapter has a number of results-driven focus groups, and matching a volunteer’s skills and interests to the focus group that would suit them best is key to getting the most out of a volunteer, in addition to offering them a sense of achievement in being involved as a volunteer.

Adam

What is your favorite part of your role?

Oleg Seeing the results of hard work of the Chapter materializing, be it a successful event with positive feedback, more members joining PRMIA or taking up its training, desire of various professional or commercial organizations partnering with PRMIA, and also increasing demand from volunteers to join the London Chapter. Rustum

Volunteering can be extremely rewarding. Personally, for me being involved with PRMIA gives me the opportunity to network with like-minded risk professionals by organizing and attending various events run by the London Chapter.

Intelligent Risk - July 2021

007

Adam

How many hours per month/week do you usually volunteer?

Oleg As a Chair and a Regional Co-Director, I spend between four and five hours per week. London Steering Committee members are expected to contribute at least two hours per week, Regional Directors - three to four hours per week; however, preparing for and chairing Steering Committee meetings takes additional time. Rustum

Between three to five hours per week. This is not set in stone, and there may be busier times if one is working on an event or deliverable on a certain project. However, planning and creating a workflow certainly helps with time management.

Adam

How has being a part of PRMIA impacted your personal / professional life?

Oleg The biggest impact is that it connects me to a wide community of like-minded individuals at all levels of seniority and gives additional credibility of being part of a large international professional association. Rustum

On a personal level, joining PRMIA has really helped me further expand my network while cementing existing relationships. I’ve also made some friends along the way.

Adam

What skills have you developed or honed while volunteering?

Oleg Soft skills and influencing others is a must have when running a chapter in a volunteer organization. Luckily, I had plenty of opportunities to practice these skills when running complex cross-functional transformation programs during my career in consulting. Rustum

Luckily, my volunteering role as a Scout Leader has taught me how to work with and manage other volunteers. The biggest challenge is managing other volunteers who need to be motivated in order to deliver, rather than using a more directive approach. It is obvious that both of these exceptional leaders have both given and received by being part of PRMIA. If their story inspires you, why not contact us to learn how you can become a volunteer? Reach out to adam.lindquist@prmia.org.

interviewees Oleg Lebedev

008

Intelligent Risk - July 2021

Rustum Bharucha

U.S. economic recovery mirrored in the stock market

by Aleksei Kirilov & Valeriy Kirilov stocks are a mirror Recently, investors, analysts and representatives of the regulators have been discussing two topics incessantly: the pace of recovery of the U.S. economy, as well as the magnitude and duration of a possible surge in inflation. We analyzed these phenomena based on the indicators of the U.S. stock market, since the market assesses not only the current position of companies and industries, but also to a large extent their prospects for further development. Information from the Finviz1 service was used as the source data. For the study, the time period was chosen from the beginning of January 2020 to the end of May 2021. In this way, we were able to compare the characteristics of the stock market before the onset of the COVID-19 pandemic with the current values.

changes in capitalization Table 1 shows data on the capitalization of U.S. stock market sectors, using their capitalization as of January 2, 2020 as 100%.

Figure 1 shows the change in capitalization of the stock market sectors as of 05/28/2021 in comparison with their capitalization as of 01/02/2020. 1 / https://finviz.com

Intelligent Risk - July 2021

009

Figure 1 - Capitalization of the stock market sectors as of 28.05.2021, the level as of 02.01.2020 is taken as 100%

In a previous article2, we have already examined how various industries behaved during the market decline in February - March 2020. It is interesting to compare how the capitalization of the market sectors changed during the recovery from the moment of the largest market decline on 03/23/2020 to the present. Figure 2 shows data on the growth of capitalization of the stock market sectors in comparison with the S&P 500 index from 03/23/2020 to 05/28/2021 (capitalization as of January 2, 2020 is taken as 100%). Figure 2 - Growth in capitalization of stock market sectors from 03.23.2020 or 05.28.2021

differences between sectors In accordance with the value of capitalization growth after the crisis, all sectors can be conditionally divided into three groups, see Table 2.

1 / Aleksei Kirilov, Valeriy Kirilov. Change in the sectoral structure of the American stock market due to COVID-19 as an additional risk factor. Intelligent Risk (PRMIA), November 2020, https://issuu.com/prmia/docs/intelligent_20risk-oct_202020-issuu

010

Intelligent Risk - July 2021

The largest growth was shown by the following sectors: Basic Materials, Communication Services, Consumer Cyclical and Technology. The stocks of companies in these sectors can be classified as “growth stocks” with the exception of the stocks in the Consumer Cyclical sector3. The large growth in these four sectors seems to be due to the fact that it was in these sectors that investors’ funds were originally directed. And investors did not lack liquidity, which was provided by the Fed as part of a huge quantitative easing program. The shares of the Energy, Financial, Industrials and Real Estate sectors can be conditionally referred to as the so-called “value shares.” These sectors have started to grow rapidly since about November last year, as signs of economic recovery and consumer demand emerged. The capitalization of the Energy sector has not yet returned to its pre-crisis values. This is possibly due to the fact that the demand for oil in the economy has not yet reached pre-crisis levels, since it is the level of oil production and refining that largely determines the dynamics of this sector. The lowest growth since March last year, only 24%, was shown by the capitalization of the Utilities sector. It can be assumed that the shares of this sector have been the least attractive to investors so far. Companies in this sector provide businesses and households with electricity, water, gas, i.e. everything necessary for normal functioning. Therefore, this sector can be used as an indicator to assess the degree of economic recovery. Of course, this is only a rough estimate in order of magnitude. As can be seen from the data shown below in Figure 3, approximately in the second half of April, the sector’s capitalization practically reached pre-crisis values. This may indicate that the restoration of the normal functioning of households and businesses is close to completion. And the results of this recovery can be seen in the data on GDP, industrial production, consumer demand, and other macroeconomic parameters for the second quarter of this year.

3 / In the Consumer Cyclical sector, shares of two companies are very heavy: Amazon and Tesla. At the beginning of 2020, the weight of these two shares was 29%, and on May 28, 2021, 39%. This probably partially explains the change in the capitalization of this sector. It should be noted that the capitalization of only five companies from the so-called FAANG group (Facebook, Apple, Amazon, Netflix, Google) at the end of May this year is 16.4% of the total market capitalization. Studying this phenomenon is beyond the scope of this article.

Intelligent Risk - July 2021

011

Figure 3 - Relative change in the capitalization of sectors with different rates of post-crisis growth

differences between sectors As shown in another previous article4, disruptions in global supply chains have led to a sharp rise in commodity prices. Today, there is a shortage of many critical materials and goods in the world: grain, metals, lumber, computer chips, etc. In addition, inventories of materials and goods held by corporations are at very low levels. When this occurs, companies begin to purchase products for the future that are necessary for their business, that is, they try to maximize their inventories. This leads to further price increases which, in turn, are already beginning to affect the prices of services and consumer goods. Perhaps this effect is one of the reasons for the significant growth in the capitalization of companies in the Basic Materials, Communication Services, Consumer Cyclical, and Technology sectors because, as we said earlier, the market assesses not only the current position of companies and industries, but also to a large extent their prospects for further development. Thus, in the growth of the capitalization of companies in these sectors, the market today implicitly anticipates an increase in inflation in the future. The main U.S. macroeconomic parameters may return to pre-crisis values by about mid - late summer. However, the Fed’s leaders continue to declare that it is not going to wind down its quantitative easing program this year and, even more so, it is not going to raise the interest rate. The Fed and other major central banks have literally flooded the market with cheap money. The S&P 500 index at the end of May was 29% higher than the pre-crisis values, which is well ahead of the economic recovery and reflects the obvious overheating of the U.S. stock market.

4 / Aleksei Kirilov, Valeriy Kirilov. Impact of the pandemic on global supply chains. Intelligent Risk (PRMIA), April 2021, https://issuu.com/prmia/docs/intelligent_risk-april_2021_issuu

012

Intelligent Risk - July 2021

a soft landing? Such a policy could potentially lead to a sharp rise in inflation by the beginning of autumn, forcing the Fed to greatly reduce its quantitative easing program. This would lead to a sharp decrease in liquidity in the U.S. stock market and a strong correction. To prevent such a development of events, individual representatives of the Fed already in June hinted about plans to reduce the quantitative easing program earlier. However, in order to ensure a more predictable behavior of the stock market, it is advisable for the Fed to officially announce already in July the terms and conditions of the gradual curtailment of the quantitative easing program.

authors Aleksei Kirilov Partner, Conflate LLC Conflate is a Russian management consulting company specialized in strategy, risk management, asset management and venture investment. As the partner of Conflate, Aleksei is responsible for asset management and venture investment. He specializes in the US stock and debt markets. Aleksei has more than 15 years of experience in financial services including development of financial strategy and financial KPI, liquidity management; controlling system, allocation of expense on business unit, financial modeling and debt finance. He has cross industries experience: banks, oil & gas manufacturing, real estate. Aleksei has an MBA from Duke University (Fuqua School of Business), a financial degree from Russian Plekhanov Economic Academy and an engineering degree from Moscow Engineering Physics Institute.

Valeriy Kirilov General Manager at Conflate LLC Valeriy is the General Manager at Conflate LLC. He has 15+ years’ experience in risk management and management consulting (BDO, Technoserv, then at Conflate). Besides he previously worked in the nuclear power industry (safety of Nuclear Power Plants). Valeriy has an MBA from London Metropolitan University as well as a financial degree from Moscow International Higher Business School MIRBIS and an engineering degree from Moscow Engineering Physics Institute. He holds the PRM and FRM certifications and the certificate of Federal Commission for Securities Market of series 1.0. Valeriy was a member of the Supervisory board of the Russian Risk Management Society in 2009 – 2010.

Intelligent Risk - July 2021

013

review of the changes in the CVA framework beyond Basel III

by Sam Sharma Credit Valuation Adjustment (CVA) represents a significant source of balance sheet P&L volatility, and its effective hedging has important consequences for liquidity and efficiency of derivatives markets via decision of banks to hedge or not to hedge the CVA risk. This article summarizes and analyzes the revisions to the Basel III framework in two parts: A and B.

Figure 1: Timeline of the changes in the Basel III CVA framework

A. CVA Risk Framework: Revisions announced in 2017 (d424) The CCR charge was focused on the actual default of the counterparty rather than the potential accounting losses that can arise from CVA. To close this gap in the framework, the BCBS introduced the CVA risk charge to capitalize against variability in CVA, i.e. potential mark-to-market losses prior to any counterparty’s default (BCBS, 2015). However, there were many deficiencies in uniform modeling the CCR and CVA risk across different financial institutions that were gradually acknowledged by the regulators. For example, banks’ internal models could not determine correct sensitivities that reflected market conditions, there were no standardized shock periods for portfolio stress testing, and the portfolio correlation structure and capital aggregation could not be carried out in a risk sensitive manner. The risk sensitivities that were the inputs for the CVA VaR calculations were different from those produced by the actual CVA models used by banks under the IMM approach. This was problematic because CVA risk was then measured differently from the risk metrics that banks used to hedge the CVA.

014

Intelligent Risk - July 2021

Alignment with the FRTB-SA framework through sensitivities: The BCBS provided some useful modifications in the framework in this regard so the internally determined sensitivities could be used for determining their regulatory capital without having a significant increase on overall regulatory capital requirements. The revised framework based the SA-CVA sensitivities on the front office / accounting CVA exposure model. The banks are now required to estimate the expected exposure on the counterparty based on different scenarios for market risk factor(s) at different time steps for the life of the derivative contract. This time profile of expected exposure feeds into the CVA sensitivities (MAR50) and into the exposure at default (EAD), which is used for calculating the default risk capital charge for counterparty credit risk (CCR). Additionally, to reduce the subjectivity in the estimation processes, the internal model method was removed. Banks would now choose to adopt one out of three approaches for CVA capital calculations, namely 100% of counterparty credit risk capital charge if the notional of non-centrally cleared derivatives is less than $100 billion, the basic approach (BA-CVA); which utilizes EADs from the Basel III CCR framework with prescribed risk weights and capital calculation formulas and the standardized approach (SA-CVA), which is a sensitivity-based calculation similar to the FRTB Standardized Approach (FRTB-SA) and required supervisory approval.

B. CVA Risk Framework: Changes announced in July 2020 (d507) and beyond. In light of revisions to the FRTB market risk standards in January 2019 and industry feedback, BCBS proposed targeted and final revisions to the CVA standards. Changes include adjustment to risk weights, introduction of index buckets for credit and equity sensitivities, and a revised aggregation formula, treatment of client cleared derivatives, exclusion of immaterial CVA exposures to secured financing transactions (SFTs), reducing the SA-CVA multiplier (CVA) and the implementation of a discount scalar for BA-CVA capital charges. Less conservative capital requirements: The justification for the original mCVA multiplier was to compensate for a higher level of model risk in calculation of CVA sensitivities in comparison to sensitivities of market value of trading book. The ISDA’s Quantitative Impact Study QIS results estimated that the overall impact on CVA risk capital requirements due to the proposed d424 method changes was +58% compared to the existing full scope under d189 for the CVA capital requirement. Thus, in line with industry expectations the multiplier was reduced. Assuming a 100% SA-CVA portfolio, the maximum benefit of reducing the mCVA multiplier to 1 is now capped at a 20% reduction1 in the CVA capital charge for a bank’s total portfolio under BA-CVA for a financial institution.

1 / i.e. = (1.25−1)÷1.25

Intelligent Risk - July 2021

015

Treatment of SFTs: The price of an SFT is primarily driven by the market data of the underlying collateral, which reflects the supply and demand factors of the underlying collateral. Since the market data used by banks to mark SFTs do not generally reflect the counterparty credit risk of the counterparty due to significant overcollateralization, a bank would not record any mark-to-market CVA losses from a deterioration of the counterparty for SFTs prior to default thereby eliminating the need for recording associated CVA capital charge. This has been taken into consideration and now fair valued SFTs where CCR risks are immaterial can be excluded from CVA calculation. Further, all eligible external CVA hedges are now excluded from a bank’s market risk capital charge calculations in the trading book and non-eligible external CVA hedges are treated as trading book instruments and are capitalized via the revised market risk standard. In light of the above, the revised CVA framework offers a more standardized tool for the regulators to compare and benchmark the effect of CVA regulation on the financial institutions and is also more risk sensitive to the market thus promoting alignment with the accounting (IFRS 13) framework.

references Review of the Credit Valuation Adjustment (CVA) risk framework (bis.org) https://www.ey.com/en_us/banking-capital-markets/final-targeted-revisions-to-the-cva-risk-framework

author Sam Sharma Sam (Satyam) Sharma is a Jr. Analyst at Canada Mortgage and Housing Corporation (CMHC), Ottawa in the Risk Management Group. He holds an MSc in Finance from the Telfer School of Management, Ottawa along with MS and BS in engineering from McMaster University and Indian Institute of Technology respectively.

016

Intelligent Risk - July 2021

How do I lead in these turbulent times?

How can remote work help me and my business? How do I communicate business plans amid uncertainty? How should I handle difficult remote conversations with my customers and employees?

Uncertain Times Call for Trusted Facts. PRMIA Sustaining Members have complimentary access to The Wall Street Journal. Become a member today at www.prmia.org

managing financial risks in (re)insurance in the postpandemic world

by Thomas Weber & Jörg Günther increased financial uncertainty After almost 25 years of relative macroeconomic stability and growth – a period called the Great Moderation (1980s to 2007)1, the shock of the Global Financial Crisis in 2007/2008 has now been succeeded by another global crisis, the coronavirus pandemic. This pandemic has caused a global economic shock not seen before in the past 75 years, triggering a rollercoaster ride in the financial markets. At the same time, debt levels are at record highs. Additionally, central banks are increasing their balance sheets, thus raising major concerns. How does this translate into the risk management perspective of (re)insurance companies? Financial risk management for (re)insurance balance sheets typically uses a liability-based replication portfolio to define a risk-free position2. The balance sheets of (re)insurance companies consist of claims to be paid in the future and of assets backing those claims. Claims are partially sensitive to inflation (a sensitivity not always precisely known), and some of these have longer maturities than the longestmaturity liquid traded assets available, creating what is commonly known as mismatch risk. This poses new challenges in the current situation.

financial risk management considerations From a long-term-perspective, there could be significant risk in what we call risk-free (bonds). Fixed income with almost zero (USD) or negative (EUR) nominal interest rates has little upside and significant downside from both rising interest rates and/or rising inflation scenarios. What is being discussed in capital markets as an investment problem could destabilize the foundations of financial risk management, also taking into account that there is a leverage of fixed-income asset length in relation to risk-absorbing capital.

1 / Episodes of financial crisis like the bond market crisis of 1994, the Asian financial crisis of 1997, and the bursting of the dot-com bubble in the early 2000’s still occurred. 2 / Once the replication portfolio is translated into the world of real assets such as government bonds, risk (as credit/default risk) is unavoidable, even when considering the lowest-risk asset available.

018

Intelligent Risk - July 2021

This risk may materialize in the form of unexpected inflation or expected inflation in combination with financial repression (central bank yield-curve control and regulatory requirements for banks and insurance companies that provide incentives to hold government debt), deeply negative real interest rates for longer periods, or other forms not yet clear as of today. The change in established correlation relations could be another symptom of this regime change: The short-term/long-term correlation of equity return vs. fixed income return may reverse. It is unclear whether there is a clear-cut tipping point for this, but the likely end of the long-term trend of decreasing interest rates is the key driver (see box).

the bond-equity relationship In recent decades, the relationship between bond markets and equity markets has been characterized by offsetting price movements in stress situations. This has been a consequence of increased risk aversion by investors in those moments and due to central bank intervention. Calculating the correlation based on historical time-series containing periods of stress yields a strong negative bond-equity correlation. Looking forward, this relationship is in danger of breaking down3. There are three basic scenarios, none of which is pleasant: 1. A further reduction in their current low level leads to deeply negative interest rates only a few years from now – putting further stress on income levels from investment for insurance companies 2. Interest rates move sideways, with equities losing the tailwind of the past 35 years’ long-term trend of decreasing interest rates4. 3. Interest rates increase in the long term, producing a headwind for equity returns in the future, flipping the bond-equity correlation from negative to positive. All three outcomes, though of different quality, could be classified as a regime change. Looking forward, they may render current investment and diversification strategies less effective compared with historical data.

Does financial risk management logic hold up in a scenario in which the debt crisis becomes more acute, threatening the stability of the financial system? If stabilizing the economy and financial markets is considered the biggest problem by central banks and governments, there may be a higher tolerance for inflation risk induced by policy measures. Risk management tools may get derailed if they rely exclusively on historical data, while the future follows a different logic.

3 / The Economist: Why people are worried about the bond-equity relationship, March 6th, 2021 4 / Lukasz Rachel and Thomas D Smith: Secular drivers of the global real interest rate (Bank of England, Staff Working Paper No. 571, December 2015)

Intelligent Risk - July 2021

019

The underlying assumptions regarding risk-return relationships, volatility, correlation, and inflation may change due to a regime change accelerated by the pandemic and the policy reactions thereafter, often characterized as unprecedented.

a broader risk management perspective If low interest rates and inflation risk are significant relative to the riskiness of what is traditionally coined as risky assets, there is no absolutely risk-free position (in the long term). How can insurance companies emphasize long-term robustness rather than short-term return maximization? One option would be to take more real (or “reflation”) assets such as equity and real estate as a risk mitigation tool (not a return-maximizing tool), backed by more risk capital as a short-term shock absorber. Risk modelling with a one-year time horizon captures volatility as the main risk, and by definition cannot account for the long-term trend risk to which long-term investors are exposed. The short-term perspective could and should be complemented by long-term risk considerations. This broader view (as represented by the Own Risk and Solvency Assessment (ORSA) of the Solvency II directive) could ideally lead to more balance sheet resilience, a mitigation of trend risks and a countercyclical financial risk-taking strategy. A logical reaction to a higher level of uncertainty in the post-pandemic world would be to rebalance the trade-off between capital efficiency and shock absorption capacity by providing more capital. There is no free lunch: The cost of this will be a lower return on equity, at least in the short run.

authors Thomas Weber Thomas is Global Head of Financial Risk Management at Munich Re, responsible for financial risk related to insurance products and investment risk of the balance sheet. He has a background in mathematics and finance. Working in banking and insurance for more than 20 years.

Jörg Günther Jörg is a Senior Risk Manager for Financial Risk Management at Munich Re, responsible for financial risk related to insurance products and investment risk of the balance sheet. Prior to that Jörg was part of the structuring team for Insurance linked Securities and worked in the banking industry in project finance, structured credit and securitization.

020

Intelligent Risk - July 2021

the stock market and COVID-19

by Dr. Maya Katenova Indeed, the COVID-19 pandemic has had a down turning effect on the stock markets as companies experienced shortage of revenues due to lockdown measures. The COVID-19 pandemic’s effect on the stock market is evident around the world; however, the degree of impact tends to vary from country to country. Baek and et al., (2020) studied the impact of COVID-19 on the U.S. stock market via application of the Markov Switching AR Model. Application of the model enables us to focus on lower as well as higher volatilities in the stock market performance. The analysis included selected economic variables, which had direct relationships with stock market performance in line with machine learning variables. The study included several industries that were utilities, tourism, tobacco, petroleum and natural gas, consumer goods, food production, telecom and broadcasting, business equipment, personal and business services, steel, fabricated products & machinery, electrical equipment, automobiles & trucks, and healthcare. Industries were classified into Panel A and B. As the deviations were obtained, regression analysis was conducted. Overall, it was found that with an increasing total number of infected as well as deaths, the U.S. stock market became riskier. Systematic and idiosyncratic risk in all observed industries have increased. However, industry-level analysis revealed that systematic risk increased in case of defensive industries namely telecommunication and utilities. However, it was lower in case of aggressive industries such as automobiles and business equipment. Analysis of total risk across industries via combining economic variables as well as COVID-related variables demonstrated that stock market performance was more sensitive in case of news on COVID-related deaths as recoveries. Namely, news about the deaths were more influential in comparison with positive news on recoveries (Baek and et al., 2020). Evidence from the Australian stock market revealed that COVID-19 has had an adverse impact on the overall Australian economy as well as stock market performance (Alam and et al., 2020). Nevertheless, negative impact was not evenly distributed among different sectors. It was found that some sectors represented in the Australian stock exchange have become highly vulnerable, while other sectors performed better. Analysis was based on eight different sectors, which included transportation, healthcare, pharmaceuticals, food, real estate, energy, telecommunications, and technology. The metadata analysis was derived from the Australian Securities Exchange (ASX). Specifically, authors analyzed risk-return characteristics on announcement of the events related to COVID-19 outbreak in each country. For instance, sectors including pharmaceuticals, healthcare, and food gained high positive gains when the COVID-19 outbreak was announced on February 27th, 2020. After the announcement and onwards, the aforementioned sectors, in line with telecommunications, exhibited positive returns whereas the transportation industry experienced downturns.

Intelligent Risk - July 2021

021

Khan, et al., (2020) analyzed the COVID-19 impact on the stock market performance in 16 countries through application of the OLS regression model. The analysis was based on the new COVID-19 cases reported on a weekly basis and stock returns. Overall, the analysis had demonstrated that an increase in the number of infected had a negative correlation with stock returns. Moreover, in order to assess overall stock market performance, it was decided to compare returns of leading indexes of selected countries in the pre-COVID period with the current period with COVID. Furthermore, it was found that investors had not reacted much to the news about the new cases at the beginning of pandemic. However, when it was announced that the virus is transmissible from a human to a human, all analyzed market indexes have reacted negatively in short and long-term. The U.S. economy has been severely affected by the COVID-19 outbreak. Moreover, the country has experienced the largest death cases in the world due to inability of the government to sustain spread of the virus. Analysis of 125 different sectors of economy by focusing on the stock market returns was conducted in order to reveal industry-specific factors affecting stock returns. Hence, factors included in the analysis were industry-specific and macroeconomic ones. It was identified that systematic factors negatively affected industries such as airlines, real estate, aerospace, oil and gas, tourism, retail apparel, and brewers. These industries are highly dependent not on the macroeconomic measures undertaken by the government, but by the policies on sustaining the virus outbreak. Moreover, it was discovered that macroeconomic factors led to generation of losses in industries such as equipment production, machinery, electronic and electrical products (Thorbecke, 2020). On the other hand, the study comparing the news announcements on new cases and fatality rates on the S&P 500 discovered that country-level and global news announcements improved the realized volatility of the S&P 500. It can be interpreted as virus-induced uncertainty about the future increased the stock market volatility. Hence, the longer the pandemic is, the higher will be the market volatility, which imposes significant financial risks (Albulescu, 2020). The study of the COVID-19 impact on stock market performance in G-20 countries was conducted based on the event study to determine interrelationships between news on COVID-19 and abnormal stock returns (Singh and et al., 2020). The regression analysis was conducted in order to determine major causes of the stock return abnormality. The studied window included 58 days after the COVID-19 outbreak news was released in international news media. It was observed that there were negative abnormal returns within the first 58 days. Negative returns were observed in case of both developed and developing countries. Furthermore, cumulative average abnormal return (CAAR) from 0 to 43 days went from -0.7% to -42.69% as a consequence of the stock market shocks. Further, it was observed that from day 43 to 57, the CAAR was improved from -42.69% to -29.77%, which was a recovery of stock markets and price correction. Aslam, et al., (2020) analyzed COVID impact on eight stock indexes of European Union countries from January 1st, 2020 to March 23rd, 2020. The Hurst variables have been calculated by implementing multifactorial detrended fluctuation analysis (MFDFA). It was identified that there was multifractality being observed in European stock markets during the COVID-19 pandemic. Multifractality played the main role in variances in the market efficiency.

022

Intelligent Risk - July 2021

Surprisingly, it was found that the Spanish stock market was the most efficient one, while the Austrian market was the least efficient one. Stock markets of countries such as Germany, Italy, and Belgium possessed the medium range of market efficiency. Haroon and Rizvi (2020) focused on the news media coverage of the COVID-19 spread and stock market behavior based on the sectoral analysis. The main assumption was that the panic caused by the news media coverage could have resulted in increased stock market uncertainty and stock price volatility.

author Dr. Maya Katenova Maya Katenova, DBA, PRM, DipPFM, Assistant Professor of Finance, KIMEP University. Maya teaches bachelor students as well as master students including Executive MBA students. She has received a Teaching Excellence Award in 2017. Courses taught in her portfolio include such courses as Financial Institutions Management, Ethics in Finance, Financial Institutions and Markets, Principles of Finance, Corporate Finance and Personal Finance. She supervised Master Thesis Dissertations of several students and has numerous publications in different journals including high quality (Q1-Q2) journals. Research interests are mostly related to financial literacy and retirement planning as well as corporate social responsibility and global ethics. Maya is Professional Risk Manager and is planning to teach Risk Management in future. Her future career is strongly connected with Risk Management Conferences, symposiums and workshops.

HAVING

PRM AFTER YOUR NAME IDENTIFIES YOU TM

AS AMONG THE

best in the profession

ENHANCE YOUR PROFESSIONAL CREDIBILITY www.prmia.org

APPLY NOW

integrating sustainability: the challenges and the emerging risk assessment process

by Rajagopal Kannan introduction Sustainability is a buzzword of today’s business world. Sustainability means “ability to meet the needs of the present without compromising the ability of future generations to meet their own needs”1. In finance, it is “a concept intimately related with climate-related and environmental considerations but that also includes Social and Governance aspects commonly referred to as ESG”2. The UNFCCC, the Sustainable Development Goals (SDGs) and The Paris Agreement – 2030 Agenda signed by 196 countries in 2015, followed by the FSB Taskforce for Climate-related Financial Disclosures (TCFD) recommendations in 2017 have set the precursors to national and international regulators, supervisors, and standard setters to initiate various climate-related risk disclosure requirements.

The recent regulatory initiatives (Box 1) have set a momentum in the sustainability transformation by Financial Institutions (FIs) - Banks, Investment, and Insurance companies - which are in different phases of adopting environmental and climate-related risks. This requires risk managers to upgrade their toolkit to cope with the changing risk dynamics. On this backdrop, we explore here the climate-related risk drivers and its linkages to FIs, the challenges with the evolving Environmental Risks Assessment (ERA) process.

1 / Report of the World Commission on Environment and Development: Our Common Future, March 1987. https://sustainabledevelopment.un.org/content/documents/5987our-common-future.pdf 2 / NGFS: Sustainable Finance Market Dynamics: an overview, March 2021. https://www.ngfs.net/sites/default/files/medias/documents/ngfs_report_sustainable_finance_market_dynamics.pdf

024

Intelligent Risk - July 2021

environmental & climate - related risk drivers and its linkages to FIs Events such as global warming, Carbon (CO2) & Green House Gases (GHG) emissions, pollutions etc., are known as environmental and climate change incidents/events negatively impacting businesses, society, and the wider economy. These risk drivers are broadly classified into physical and transitional risks. Physical risks include risks that arise from changing weather and climatic conditions that impact economies, whereas the transitional risks include risks that arise from transitioning an economy that is more reliant on fossil fuels to low-carbon economy due to changing market preferences, government policies and regulatory initiatives3. The climate change events pose a threat to the safety and soundness of individual FI and to the stability of the financial system. The Network for Greening the Financial System (NGFS), a voluntary group of Central Banks and Supervisors recognizes that “Climate-related risks are a source of financial risk”4. FIs direct exposures to climate-related risks arising from its own operations are insignificant. What is more relevant to FIs is the climate-related risks exposed through its investments and its loan portfolios. The chain of events through which the climate events transpired into the financial risks are called causal chains or transmission channel. For instance, the business operations of a counterparty to whom the FI has extended financing facilities may, or potentially may, have negative environmental and climate related impacts. Leaving these risks unmanaged may cause business disruptions, legal issues resulting into liabilities such as fines, penalties and compensations and loss of market share to the counterparty. All of these will negatively affect the bottom-line figure and cash-flows of the business vis–a-vis its credit standing which in turn will lead to revenue loss, asset quality deterioration, and reputational damages to the financing entity. Additionally, the climate events occurring within an economy on a macro level may cause lower GDP, employment, household income, savings, and investments, which in turn may lead to revenue losses, higher probability of defaults (PDs), and lower collateral values (lower LGDs) resulting into financial risks to FIs. The causal chain in the former case is known as micro (entity level) transmission channel whereas it is known as macro-transmission channel in the latter case.

3 / Bank for International Settlements, BCBS. Climate-Related Risk Drivers and Their Transmission Channels. May 2021. https://www.bis.org/bcbs/publ/d517.pdf 4 / NGFS: First Progress Report, October 2018. https://www.ngfs.net/sites/default/files/medias/documents/818366-ngfs-first-progress-report-20181011.pdf

Intelligent Risk - July 2021

025

Chart 1 - The linkages and contagious effect of Climate-related events on FIs Financial Risks

Adopted from NGFS Climate Scenarios for Central banks and Supervisors, 2020

The challenges – the unique features of climate–related risks that distinguish them from other traditional risks are: • Highly uncertain: The speed at which climate changes are evolving, its timings and magnitudes are highly unpredictable and unprecedented in nature. Having said that the backward–looking approach (historical analysis) appears to be less relevant for climate change estimation which typically involves a longer time horizon of 20 to 30 years. • Heterogeneities: The climate-related risk drivers are heterogeneous at different levels such as geographics, jurisdictions, industry sectors and products. It remains as a source of variability leading to differential impacts on the financial risks for a given climate change event. • Nonlinearity: The physical and transitional risks drivers are inter-related and cause a knock-on effect on each other. Further, they are non-linear i.e., events exceeding the ‘tipping points’ could cause catastrophic, irreversible, and unquantifiable financial impacts. These distinct features pose challenges in estimating its exact impacts on FIs financial risks and as such a more granular and forward-looking approach is warranted.

026

Intelligent Risk - July 2021

emerging Environmental Risk Assessment (ERA) process: Climate-related risk is not a new risk, it is rather an additional dimension to the existing traditional risk categories such as Credit, Market, Liquidity and Operational risks. In order to price this additional risk dimension, FIs must enhance their existing risk assessment framework by systematically incorporating environmental criteria into its risk management policies, procedures, and assessment process.

Intelligent Risk - July 2021

027

The ERA process, therefore, involves an extra layer / model on the existing risk management process that converts the climate-related risk drivers into financial risk impacts. For this purpose, there are several models developed by researchers, FIs, supervisors, and third-party vendors. The output from these models become the inputs to the existing conventional risk models to produce climate adjusted financial risks. Notwithstanding that the ERA models differ from each other in terms of data requirements, approaches such as bottom-up, or top-down, and quantification techniques applied, they all tend to have a similarity in its high level functional process as depicted in Chart 2.

conclusion The ERA framework and its measurement methods are still in the early stages of evolution. There are a few gaps in terms of data, risk classification methods, methodologies suitable for assessing long-term climate phenomena, and limited empirical evidence of climate-related risks on liquidity and operational risks5 However, the risk management landscape in this respect is changing swiftly, as FIs have started optimizing on the feedbacks loops from their ERA pilot project implementations while trying to capitalize on the business opportunities resulting from proactive and early integration of ERA into their pricing strategies and risk management decisions.

author Rajagopal Kannan Senior Techno – Functional Consultant Imberg Consulting GmbH, UAE Rajagopal Kannan is a Risk management Consultant & Trainer based in United Arab Emirates (UAE) and is currently associated as a Senior Techno – Functional Consultant with M/S. Imberg Consulting GmbH, a consulting firm based in Switzerland offering consultancy and software solutions for Banks and Insurance companies. Prior to his current engagement, he worked as Risk Manager of a bank-based in UAE. He has 12+ years of banking experience spanning into credit origination, credit structuring, risk management. His domain expertise includes Basel II & Basel III, Risk modelling, Regulatory risk reporting, Internal Control and Auditing, IFRS -9 and ESG risks. He holds PRM, GRCP, GRCA, CRCMP and CBiii Pro. certifications.

5 / Bank for International Settlements, BCBS. Climate-Related Financial Risks: Measurement Methodologies. May 2021. https://www.bis.org/bcbs/publ/d518.htm

028

Intelligent Risk - July 2021

microfinance risk and the future

by Adam Lindquist I spoke with Desara Sina, Head of the Risk Management for Albania-based Fondi Besa jsc, about how microfinance has been impacted by recent worldwide events and where it will go in the future.

Adam

Can you share how COVID impacted your organization and/or how you feel it impacted microfinance in general? Desara COVID-19 is already the key word of our daily life that came as a sudden threat to life and lifestyle all over the world. The exponential spread of the number of people infected with COVID-19 correlates with the economic downturn, which came as a result of measures taken by the government to keep under control the striking power of this virus and save health systems. The effects of the closure for months caused colossal financial difficulties. As a result, the economy went into recession. For many businesses, the anti-COVID measures proved fatal, while for many others it brought them to the brink of bankruptcy. This risk for an unconsolidated economy like Albania’s is that it had major consequences. Small businesses and the self-employed, who were shut down due to quarantine, illness, or insecurity to provide services to clients, found themselves without income. On the other hand, utility costs, taxes, and other liabilities are comforted in their balance sheets in difficulty and here for hundreds of thousands of individuals and families. In this context, the microfinance sector, having a wide reach in the country’s economy as a leader in financing small business, farmers, and the basic needs of the Albanian family, accounting for about 68% of the total number of loan applications instead, would necessarily be impacted by the situation. In the context of the COVID-19 pandemic, although the government’s plan to postpone customers’ liabilities to the financial system sounded hopeful at first; in fact, these liabilities would simply accumulate to be paid later. But this process also posed a risk to the microfinance sector. Unlike the banking sector, which not only has sufficient liquidity due to the collection of customer deposits but also due to the supply of liquidity from the Bank of Albania, microfinance institutions do not have these opportunities. The funds used by microfinance to lend to their clients are internal equity funds, financing instruments (such as bonds or other securities), and the lines of financing they receive from larger financial institutions, such as second level, or regional development ones.

Intelligent Risk - July 2021

029

The Besa Fund, since the beginning of this pandemic, took immediate measures, building the appropriate scenarios to face any kind of challenge that tomorrow could bring. The main elements at the core of the strategies for managing this unprecedented situation were: saving lives, business continuity, and maintaining uninterrupted contacts with customers and their service through alternative channels making maximum use of technology. The main risk during the lockdown and the government’s decision to postpone payments brought a significant threat to all non-bank institutions that would be brought by the liquidity stalemate. This decision was not accompanied by any support from the government, for support of institutions affected by non-collection of credit. Immediately the Besa Fund built stress tests related to liquidity, and fortunately its solid financial situation managed to cope with the situation even in the worst scenario (when no loan would be repaid) and at no point to stop lending. Keeping up with the challenges of the time and the current situation enabled the rapid construction of new processes in the way of management, increasing communication with customers in accordance with all the mitigation measures offered, while staying vigilant to responding to potential risks that could materialize at any time. We can say that the Besa Fund successfully overcame the difficult period of the total lockdown of the country and handled the requests of any client that was affected by the situation. However, businesses today, especially those involved in the tourism, services, and transportation sectors still live under the pressure of the negative effects of the global pandemic caused by COVID-19.

Adam

What risks do you foresee coming for microfinace in the coming year? In the next 3 years?

Desara The pandemic, although it seems to be ending, economically is still among us. The recession in non-consolidated economies will take longer to overcome. Government decision-making policies must pay special attention to the small and medium-sized business sectors to rebuild everything, to give a hand to those who have stopped, and to give optimism to those who today dare not think about business. The security of doing business is an important element to succeed. In my opinion, even in the upcoming year there will be the challenge to face the high level of npl caused by COVID-19 and to try to seek stability that existed before the outbreak of the pandemic. In the next three years, the potential risk will be the second wave of COVID virulence, which would find microfinance still unhealed from the first one. But, hopefully this will not happen. As a risk manager, all scenarios should be taken into consideration in order to achieve the optimal management to avoid the materialization of any risk that might have consequences for the sector.

030

Intelligent Risk - July 2021

Adam

What positive change have you seen in microfinance in the past 3 years?

Desara Being well-extended in the country’s economy, we hope that microfinance keeps growing by completing its mission to be near small and medium-sized businesses, farmers, and near tourism, where banking systems cannot perform lending. This would be realized in a country where the pandemic is being well managed, thus giving important contribution to the recovery of the country’s economy. The pandemic taught us that digitalization is an important element. The use of technology, digital channels, was an optimal solution at the time when social distance was an obligation. I believe that even in this field, in the next three years to come, there will be valuable improvements.

Adam

What innovations are in the future that you think will change the microfinance industry?

Desara Digitalization, practicality, transparency, presentation, and education of the clientele about the credit and microfinance sector.

Adam

Other thoughts that our readers would benefit from learning or knowing?

Desara According to a survey conducted by the Albanian Microfinance Association, 41% of respondents have salaries from the private sector as their main income. 46% of respondents admit that they have enough money for food but have difficulty buying clothes and household appliances such as refrigerators and televisions. 64% of respondents admit that they are not able to save money from their salaries, while in rural areas this figure goes to 71%. When survey participants were asked about how long they could live on their savings if they lost their job, about 48% of them admitted to having no savings. Particularly for respondents who live in rural areas, 57% of them admitted that they have no savings. Only 3% of them said they could afford living expenses for only one year in case they lose their job. Access to finance and getting a loan from a microfinance institution is the only opportunity for thousands of Albanian families to buy a household appliance that reduces electricity consumption and bills, the only opportunity for thousands of farmers to cover the costs of planting or breeding in the beginning of the season, the only opportunity for thousands of entrepreneurs to invest in expanding their small business. The microfinance industry has greatly grown in recent years, although seen from a broader perspective it only accounts for 3.1% of all banking system assets, and only 5% of the volume of all loans granted in 2019, compared to banks. But if in comparison the value is insignificant, the number of about 250,000 disbursed financing during 2019 clearly puts the microfinance sector in a leading position in individual and small business financing in the country compared to the banking sector. Besides, out of three loan applications in the country, two of them belong to microfinance institutions and one to banking institutions. Given the profound effect that microfinance has on the mobilization of the domestic economy, the effect of the pandemic crisis must be studied in detail. Likewise, the measures taken so far need to be reconsidered, which would bring other serious financial consequences.

Intelligent Risk - July 2021

031

Archegos: a spectacular failure in risk management

by Dan diBartolomeo myopic view of prime brokers The recent failure of the Archegos hedge fund/family office was a spectacular example of the persistent deficiencies in hedge fund and broker risk management. The fund went from about a $30 Billion position to total collapse, leaving at least $7 Billion in publicly announced losses associated with failed margin calls across prime brokers at Credit Suisse, Nomura, UBS, and Morgan Stanley. A fifth prime broker, Goldman Sachs, has commented only that their losses are “immaterial.” Many investors have been left wondering how four of the world’s most sophisticated investment banks could be subject to massive losses associated with routine margin lending on a set of equity total return swaps. While not all facts have been made public, we believe that the problem arose from both weak procedures and some obvious analytical failures. Of the involved firms, Credit Suisse has already announced a change in policy to “dynamic margins” for equity return swaps. The implications of this announcement is that the prior policy was “static margin,” meaning that an investor’s deposit in a margin account did not have to grow as the value of the transaction increased. We also know that Archegos was dealing with at least five prime brokers. It is unclear if the five firms involved were aware of the existence of very similar Archegos positions at the others. This myopic view could have allowed “pyramiding” of positions by Archegos.

example of pyramiding Here is a simplified hypothetical example of how this pyramiding could have been accomplished. Investor H enters a one-year total return swap with Broker C with a transaction cost of 1% for stock X for a notional amount of $100. According to the terms of the swap, if stock X goes up over the year, C owes H 99% (100-1) of the total return on $100 worth of stock X. If stock X goes down over the year, H owes C, 101% (100 +1) of the total loss on $100 worth of stock X. Investor H deposits $25 in cash with C to cover possible losses in a decline in the price of stock X as a margin deposit. Broker C can hedge their risk by buying $99 worth of stock X which drives the price of stock X up from $100 to $200. Broker C credits $99 (.99 * (200-100)) to investor H’s margin account which now has a balance of $124 ($25 + $99).

032

Intelligent Risk - July 2021

Investor H then withdraws $99 from the margin account and sets up a new account at Broker M, then sets up the identical swap transaction that H has with broker C. Since the new account is starting with $99, it can act as a margin deposit for a position of $396. Broker M can hedge their risk by buying $396 worth of X. By pyramiding positions across two brokers, H was able to use $25 to cause the two brokers to purchase $495 worth of X, driving the price of X up further. This is equivalent to financial leverage of $495/$25 or almost 20 times. As the price of stock X keeps going up, H could again “upstream” the cash from both the accounts and set up a third account, a fourth account, and so on. This hypothetical narrative is conditional on the brokers allowing H to withdraw cash associated with “mark to market” profits before the end of the one-year term. Normally a prime broker providing this kind of facility to a hedge fund would routinely allow “mark to market profits” to be reinvested in other securities, but a large cash withdrawal would set off a lot of alarm bells. Archegos was acting like a hedge fund but was legally a family office so they might have asserted something like “we need to withdraw the cash to buy a new mega-yacht or a private island.”

stock price moves should have raised questions In the Archegos case the amounts being invested were billions of dollars per company. With leverage of four to twenty times, a large initial transaction could certainly influence the price of a typical stock enough to set the pyramiding process in motion. With five brokers having relationships with Archegos, any pyramiding effect would also be less noticeable. As of March 22nd, 2021 the price of ViacomCBS (VIAC) was about $100/per share, with the S&P 500 at 3940. One year earlier at the market bottom of the COVID crisis, Viacom was $12 and the S&P 500 index value was 2310. So, while the market was up about 70% from the bottom, Viacom was up 733%. Our internal estimates were that the beta of Viacom was 1.81 with a specific risk of 8.33% per month (29% per annum). Under the standard Capital Asset Pricing Model1, our expectation for the return for Viacom would be roughly 70% * 1.81 or 127%. The unexpected return would be 733-127 or 606% over the period. Given an expected specific risk of 29%, this is a 21 standard deviation event. Assuming returns are normally distributed, the random likelihood of such an event is 3 * 10-98 (a number like .0003 but with 98 zeros). That should have been a sufficient clue to the broker risk management teams that something was wrong, and accepting Viacom shares as collateral for billions of dollars in loans was probably not the best idea. Even when we account for our risk estimates increasing through the year contract period (e.g. tripling), this is just an event that is so improbable as to immediately raise questions.

1 / Sharpe, W.F. (1964). Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk. Journal of Finance, Volume XIX

Intelligent Risk - July 2021

033

illiquid positions The other big piece of this puzzle was incorrect estimation of liquidity. We know that the price of Viacom went from $100 to about $45 in a few days once brokers started to rapidly sell off the positions to salvage what value they could. The average trading volume over the prior month was about 71 Million shares or about $7 Billion per day at the $100 price. It has been publicly disclosed that the Archegos portfolio was concentrated into about half a dozen companies and reached a peak value of around $30 Billion, so the average position per company was about $5 Billion. The Viacom parcel was a bigger position with a peak value around $10 Billion, or more than 150% of a typical day’s trading volume. These magnitudes are consistent with a peak trading volume of over 500 million shares (a day in early April) during the “fire sale.” Equity transaction cost models produced by brokers are largely empirical. Most of them are of the form presented by Kissell and Glantz. Typically, very little data is available for one day trades bigger than 25% of “average daily volume,” as traders know these trades will be very expensive to execute and avoid them. The five brokers may have believed they were the entire Archegos positions leading to the false conclusion that their internal transaction cost models were adequate (assuming they were used at all). Such myopic approaches to liquidity estimation have unfortunately been encouraged by recent SEC reporting requirements for mutual fund liquidity. Available theoretical models of equity transaction costs assume that once a trade is outside the observed range of size, the cost of obtaining additional liquidity increases with the square of the trade size to an upper limit of 40% to 70% or more of the total position value. The observed decline of Viacom from $100 to around $45 during the unwinding of Archegos is consistent with this view.

author Dan diBartolomeo Dan diBartolomeo is founder and president of Northfield Information Services, Inc. He serves as PRMIA Regional Director for Boston, as well as on boards for several financial industry associations including IAQF, QWAFAFEW, BEC and CQA. Dan spent eight years as a Visiting Professor in the risk research center at Brunel University in London. In 2010, he was awarded the Tech 40 award by Institutional Investor magazine for his analysis that contributed to the discovery of the Madoff hedge fund fraud. He is currently the co-editor of the Journal of Asset Management and has authored nearly fifty research studies in peer review publications.

2 / Kissell, R. and Glantz, M. (2003). Optimal Trading Strategies: Quantitative Approaches for Managing Market Impact and Trading Risk. Amacom.

034

Intelligent Risk - July 2021

NSFR: final leg of liquidity regulation!

by Ashish Deccannawar Liquidity risk management is critical for the stability of the global financial ecosystem. Net Stable Funding Ratio (NSFR) is an important long-term liquidity requirement to be implemented in the United states. The aim of this article is to provide a high level viewpoint on U.S. NSFR requirements, timeline, and potential implementation challenges the industry may face.

what is NSFR? NSFR stands for Net Stable Funding Ratio. NSFR is a quantitative measure that validates banks have stable long-term funding to support the long-term stress. NSFR is measured as below:

Net Stable Funding Ratio (NSFR) =

Available Stable Funding (ASF) Required Stable Funding (RSF)

> 100%

Available Stable Funding (ASF) is composed of regulatory capital and liabilities, which are then multiplied by ASF factors to calculate the available stable funding. Characteristics that drive ASF factors include: 1. Funding tenor (longer maturities have a higher factor than shorter maturities due to rollover risk) 2. Funding type (stable deposits with deposit insurance have higher factor compared to other types of funding due to funding stability) 3. Counterparty type (Non-financial counterparties will have a higher factor compared to financial counterparties; Financial counterparties are typically a less reliable source of funding as they tend to be more sensitive to market fluctuation) Required Stable Funding (RSF) factors are assigned to the bank’s assets, off balance sheet commitments, and derivative exposures. Characteristics that drive RSF factors include: 1. Tenor (long-term assets need more stable funding to support long dated inflows) 2. Encumbrance (longer the asset encumbered, the more stable funding required) 3. Type of counterparty (higher stable funding to non-financial counterparties compared to financial counterparties; financial companies have alternate funding arrangements and are less likely to renew the loans in stress) Intelligent Risk - July 2021

035

4. Credit quality (assets with lower quality requires greater stable funding to capture the risk of default) 5. Market characteristics (assets that are traded in transparent, standardized markets with large numbers of participants and dedicated intermediaries will need less stable funding compared to assets traded in less transparent markets)

why is NSFR requirement necessary? As described in the Federal Reserve Board’s recent joint press release1, the 2007-2009 financial crisis revealed significant weaknesses in banking organizations’ liquidity risk management and positions, including how banking organizations managed their liabilities to fund their assets in light of the risks inherent in their on-balance sheet assets and off-balance sheet commitments. The 2007-2009 financial crisis also revealed an overreliance on short-term, less-stable funding, and demonstrated the vulnerability of large and internationally active banking organizations to funding shocks. Based on the lessons learned from the 2007-2009 crisis, Basel Committee on Banking Supervision (BCBS) established two main international liquidity standards, with the intent to absorb short- and long-term shock to the banking system. First international liquidity standard focused on surviving short term stress, Liquidity Coverage Ratio (LCR), to absorb 30-day liquidity stress in the system. Currently, all major US banks have implemented LCR and demonstrated their resilience and compliance even during the liquidity crisis caused by pandemic COVID19. Second international liquidity standard is a complement to the LCR and is a longterm liquidity metric called Net Stable Funding Ratio (NSFR). It is a long-term liquidity stress metric that requires banks to hold sufficient stable funding over the period of one year. NSFR is very well designed to manage maturity mismatch risk that may arise due to banks’ relatively short funding profile and will require banks to hold stable funding profile to support banks’ assets, derivatives, and off-balance sheet commitment activities.

rule timeline and overview in the U.S. BCBS established the NSFR requirements in October 2014 to mitigate the risks and weaknesses presented by the banking organizations supporting their assets with insufficient stable funding. In June 2016, the US agencies opened up the comment period on a proposal to implement a net stable funding requirement for the U.S. banking organizations that were subjected to the LCR rule. Based on the comments received from US banks, FBOs, trade groups, public interest groups, and other interested parties, regulators published the final rule implementing the NSFR in October 2020 with expectation that firms subject to the NSFR will be generating the NSFR reporting by July 1, 2021.

036

Intelligent Risk - July 2021

The finalized NSFR rule also impacted the current Fr2052a liquidity reporting (also called Complex Institution Liquidity Monitoring Report), and regulators also proposed revisions to the FR 2052a on March 29, 2021 with a 60-day comment period closing on May 28, 2021, with an effective date of implementation as July 1, 2021. In addition to this, banks are also required to start publishing NSFR disclosures by 2023.

The below a high-level view of NSFR implementation timeline.

implementation challenges One would argue the notion that firms should be prepared to implement these changes on short notice, as the proposal to implement NSFR was first introduced in June 2016. This means regulators gave banks over 4 years to adopt the changes. However, a lot has changed since 2016 as the Trump administration with their anti-regulatory agenda led industry experts to predict that NSFR may not be finalized in the US. Generally, banks are reluctant to implement the system changes based on the proposed rule. Banks would prefer to wait for the final rule prior to implementing NSFR-related data mappings. Implementing a final solution based on the proposed rule may lead to additional cost impact, if any of the mappings are changed in the final rule. The COVID-19 pandemic led to liquidity stress in short-term unsecured funding markets, but bold Federal Reserve Board actions and introduction of several emergency facilities calmed the liquidity stress in the market. Liquidity teams in the banks largely spent their year closely monitoring banks’ liquidity, with little time left to worry about NSFR implementation. Also, during the 2020 period of the peak COVID crisis in the U.S., regulators leaned towards loosening the regulatory requirements to increase the liquidity in the market. This is contrary to the NSFR rule, where banks are required to hold even more liquidity buffer to satisfy long-term liquidity metric. It is not odd to say that banks were caught off-guard when the rule was finalized in October 2020. Although a lot of large firms, including Foreign Banking Organizations (FBOs), have already implemented the NSFR reporting for their Office of the Superintendent of Financial Institutions (OSFI), European Union (EU), and other local regulators, where banks are required to comply with regulatory requirements in international jurisdictions. The fact that banks are reporting NSFR for other international regulators just confirms that banks have somewhat of a head start to implement the U.S. Intelligent Risk - July 2021

037

NSFR requirements, but I would say this certainly is a challenging and monumental task to achieve this implementation within a month of closing the comment period. As industry experts know, systems and reporting within the banks are interlinked and any change in the Fr 2052a report (also called “golden source” by many) may impact other closely related reporting such as LCR, internal liquidity stress test, and other internal liquidity metrics. It is likely that US banks, FBOs, trade groups, public interest groups, and other interested parties would not be in favor of implementing the revised FR2052a and NSFR reporting by 1st July 2021 and are likely to request for extension2 for implementing the revised FR2052a and NSFR reporting capability. This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.

references 1. https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201020b.htm 2. https://www.aba.com/advocacy/policy-analysis/joint-trades-comment-on-revisions-to-the-complexinstitution-liquidity-monitoring-report

author Ashish Deccannawar Ashish Deccannawar is a Senior Manager at one of the top 10 largest Banks in the U.S. and leads Liquidity Strategy and Governance function for their Consolidated U.S. Operations. Ashish is an expert in Liquidity risk, and Bank’s balance sheet management functions. Prior to his current role, he worked as a Senior advisor at one of the Big four consulting firms advising Global Systemically important Banks (G-SIBs). Ashish has extensive experience in advising US and foreign Banks in the Liquidity Risk space. Topics of his interest include Liquidity Stress Testing, Cash Flow Projections, Fr2052a reporting, Funds Transfer Pricing (FTP), and Net Stable Funding Ratio (NSFR).

038

Intelligent Risk - July 2021

perils of ignoring climate risks

by Dr. K. Srinivasa Rao Global warming is causing fury across the globe, devastating lives and livelihood. It leads to natural calamities and even triggers pandemics. Climate risk is mounting up into catastrophe that can be a threat to the human species if risk management is not made inclusive to protect the green planet. The sea surface temperature going beyond 28 degrees Celsius is triggering a series of intense cyclones, hailstorms, and tornados, causing extensive damage much beyond coastal regions. One cyclone following another one has become the ‘new normal’ sending shock waves, more to the poor, at the bottom of the pyramid. Though the Paris climate agreements – December 2015, mandates to limit global warming to well below 2, preferably to 1.5 degree Celsius, compared to pre-industrial levels, not much is seen to have happened to manage climate risk. Continued use of fossil fuels, deforestation and frequent forest fires due to carbon sink are inimical to climate with its perils inundating the society.

hazards of climate risks Greenhouse gases, increased carbon emissions amid continued thrust on industrialization and rapid urbanization, are collectively increasing mean global sea levels. Ocean heat waves, irreversible damage to biodiversity, and extreme weather conditions threaten food security due to floods and droughts that can hit millions of poor. The far-reaching consequences of an inability to focus adequately on managing climate risks that are responsible for unfettered carbon emissions. Even the coronavirus that is ravaging the planet is nature’s revenge for the way human habitation is living closer to wild animals interchanging space, making it easy for diseases to jump from animals to humans. Developing countries are growing fast, living amid skyscrapers and perpetuating wildlife wet markets full of exotic animals/bats, a perfect cauldron for animal-to-human viral transfer. Mania for risky developments that humans can hardly put up with unless managed well restoring ecological equilibrium.

enterprise risk management (ERM) Management of climate risk is part of ERM. But the tradeoff between near-term business aspirations of corporate entities and long-term climate control needs are not balanced well, causing imminent ecological imbalance.

Intelligent Risk - July 2021

039

ERM should be actively operationalized to include goals for climate control and assess the investments set aside for environmental-friendly projects to reduce carbon emissions, waste treatment, pollution control, and treatment of toxicity of air/gases emitted in manufacturing processes. As a value proposition, the ability of a business to deal with Environmental, Social and Governance (ESG) concerns material to it has a significant impact on its long-term sustainability. Going beyond the uptick in stakeholder values, the investors and the community should participate in assessing the performance of companies in managing climate risk through rigid implementation of ESG standards at all levels. It should be influenced by a number of factors, including the board’s knowledge of ESG rationale. How it impacts the society and what are the risk management methods to pursue sustainable ecosystem. Mere management of operational risks through business continuity plans may not be sufficient to create a compatible climate for future generations to thrive, unless an ESG tracker is firmly in place. Large manufacturing units should have carbon clocks to improve sensitivity towards climate risks. Developing a purposeful culture is important to driving ESG efforts and aligning ESG vision and principles within a company. Such a culture should be set across the enterprises and across the globe to move towards environmental protection with sustained persuasion of internal climate control goals.

climate risk management Going beyond implementing ESG as a responsible corporate citizen, it is necessary to disseminate climate literacy down to the line management and to the society at large. Even the regulators across the globe have to collaborate on a massive scale to integrate climate control as an essential risk management objective. While the ERM policy framework should be redesigned to tackle environmental degradation at the unit level, as a larger part of corporate social responsibility (CSR), better awareness has to be spread across the stakeholders. As part of sustainable development goals, climate action and climate literacy is to be initiated on a massive scale targeting the society. Climate literacy initiatives in collaboration with non-government organizations (NGOs), trade unions, educational institutions, civil society organizations, and other stakeholders have to be institutionalized at various levels on a mission mode. Beginning with plant protection, people have to realize their contribution in making the climate better, moving on to use the renewable, biodegradable and non-conventional energy sources. It is noteworthy that some active environmentalists are engaged in designing mobile apps to track and map carbon emissions so that people can contribute individually in managing climate risks. Besides including environmental protection as a part of curriculum at schools/colleges, it is more important to take up climate protection projects that can eventually make the society conscious about the climate risks. Present levels of indifference towards climate risks could invite far more disasters that can be consciously averted. 040

Intelligent Risk - July 2021

While the government should be besieged with climate control targets at the macro level, the business units and society should work its way to innovate and create micro risk management tools to protect the environment by reducing carbon footprints.

references https://www.raconteur.net/manufacturing/manufacturing-gets-personal-industry-5-0/ https://assets.kpmg/content/dam/kpmg/cn/pdf/en/2018/09/esg-a-view-from-the-top.pdf

author Srinivasa Rao Srinivasa Rao teaches risk management at the Institute of Insurance and Risk Management (IIRM), Hyderabad. India. He has been with Bank of Baroda with wide experience in managing risks at the corporate level. He was associated with business process reengineering and was engaged in asset liability management. He worked to design bank level policies to manage diverse risks in business operations. He is passionate in teaching, writing and publishing. He brings his vast industry experience to the classroom in B – Schools. He is keen in disseminating digital and financial literacy to ensure that stakeholders are able to explore the power of digital banking.

Intelligent Risk - July 2021

041

R&D metamorphosis within operations division of the banking industry

by Ashwin Baburaj The biggest gambling an operations team does, within a banking space, is the dependency of itself on the knowledge of its analyst. The analyst is responsible for making the user experience a better one, and most of these practices in the industry have been done without the complete understanding about the process or flow. This tends to create a huge gap of knowledge regarding the organization’s own processes and makes it difficult for the analyst to adjust with the ever-changing scenario within the banking world. There seems to be a dilemma in doing the process within the different operations teams because the actual purpose of doing it could come with several doubts from each analyst on the floor. For example, when there is a newly introduced process into the banking industry, then there is a risk of the process not working. In some cases, the process does not have any relation to the actual goal of the process. Processors usually do not like to change the way things are working. This would not be considered as a drawback all the time, as every change made in the operations sector relating to process modification is said to have an impact on customer service. This is where the R&D metamorphosis within the operations division is necessary within a banking spectrum. Currently there is no designated R&D division under supervision within the different operations divisions. An R&D division within its department of operations (CPB, SSO, PBB etc.,) may have the following issues: • Scattered information between different teams within the same division and using the same tools for the beginning and end process. There is no complied data for these teams and thus, the information is scattered and limited. • Improper interpretation of SOPs (Standard Operating Procedures) by the trainer will be continuously followed by the people who will be doing the process later. • Process knowledge gap between different analysts on the team and their level of understanding of the subject. • Slow pace of improvement ideas within the different teams under a department. • Slower implementation of outsourced processes and its higher chances of failure in real world scenario. • Extensive reliability for idea generation and process implementation in other departments (Example: process management and technology). 042

Intelligent Risk - July 2021

These teams could be made more effective if there is an existing R&D division for the operations team. This team would provide information about what is required to be changed in the existing process, rather than these process management and technology teams taking an initiative and potentially making changes in the process. This reduces dependency on other departments. All these above-mentioned scenarios could lead to larger exposure towards banking errors and risk too; thus, to mitigate these risks it is certainly important to have an R&D unit established under each department of operations. Doing so will have the following changes: • All the scattered information between teams from the beginning stage of the process to the end process could be combined and different error scenarios could be studied for future references. • The R&D unit would provide proper training sessions to all the team members such that they all remain on the same page regarding the flow of the process and its usage and checks. • Process knowledge gap ultimately decreases, and analysts learn to absorb the purpose of the process in the first place. • More improvement ideas could be implemented if the gap in knowledge regarding processes decrease. A detailed study of this could also be kept for future reference and study by the upcoming analyst. • The risk factors related to the failure of outsourced process or its implementation or its effects could be studied and then successfully implemented for the better working of the teams. • An established R&D unit would give a wider learning experience and deeper understanding about the risk elements involved in pushing the different layers of the department within the banking industry. These would be studies, and instant solutions would be recommended for implementation and mitigation of risk arising within departments. Thus, they will indirectly help in providing more advanced customer experiences than expected. Having an R&D unit within the banking industry for each operational department could bring in additional value to the banking system as a whole and ultimately help in speeding up the automation processes. These units must evolve with the ever-changing conditions of the banking industry across the world to improve itself while remaining up-to-date with current industrial standards and practices.

author Ashwin Baburaj Student (Post Baccalaureate Diploma in Business Management) – Cape Breton University Former Senior Analyst – Royal Bank of Scotland Former Employee – BestBuy, Canada International Finalist PRMIA case study competition 2021

Intelligent Risk - July 2021

043

chapter spotlight: PRMIA New Delhi

digitally christened New Delhi chapter springs smiles amid COVID-19 crisis New Delhi is the national capital of India. It is the seat of countless historical battles and empires spanning over several millenniums. It is also now known as the global hub for back office & mid office operations of leading global financial institutions in the world. It is home to leading financial market players, including Punjab National Bank, Canara HSBC Life Insurance, IFFCO Tokio General Insurance, and a variety of non-banking financial institutions, microfinance institutions, etc. Against the backdrop of the COVID-19 pandemic, PRMIA India decided to defeat COVID by digitally setting up its eagerly awaited New Delhi Chapter. A small group of leaders joined hands to develop a vibrant community of riskpreneurs, and the New Delhi Chapter was born in December 2020. It is interesting to note that the New Delhi Chapter was created from conception to final launch digitally. We can say this is a digital chapter in the true sense. None of the members have met face to face until now.

044

Intelligent Risk - July 2021

However, despite the COVID-19 pandemic, the bonhomie of highly inspired steering committee leaders was on full display through the successful conduct of two major webinars bringing in a large number of industry thought leaders, CXOs, professionals, academics, and students. Apart from webinars, the chapter managed to have accomplished two highly interactive sessions with ivy league business schools at New Delhi, clearly creating buzz around the PRMIA brand in the minds of young students aspiring for cutting edge knowledge, skills, and global certifications! The theme of the two major webinars were: • Evolving Role of Risk Management in Times of COVID & Beyond • Workers’ Health & Wellbeing: Risks & Mitigation during Pandemic The topics being contemporary could connect people with ease, simplifying our outreach effort. We continue to engage with corporates and leading B-Schools which has helped in bringing PRMIA to the centre of learning and development. The wholehearted support from other chapters, namely Chennai, Bangalore, and Mumbai make the journey enjoyable!

New Delhi chapter Regional Director • Pankaj - General Manager (Group Treasury), GMR Group Founding Members • Nirakar Pradhan - CEO, PRMIA India • Prashant Praharaj - Chief Risk Officer, IIFCL • Paritosh Garga - General Manager, IIFCL • Rajiv Keshri - Asst General Manager & Faculty State Bank Institute of Credit & Risk Management, SBI • Arshi Siddiqui - Senior Risk Manager, American Express • Gaurav Gupta - Asst Vice President, Barclays Bank • Saloni Sharma - Developer, American Express • Paras Jain - Treasure Marketing Unit, SBI • Saurabh Jhingan - Vice President (Risk & Compliance), Citi Bank • Samik Dasgupta - General Manager, IIFCL • Krishan Gopal - Chief Finance Officer Our mantra at New Delhi Chapter is “With PRMIA -> AIMRP” i.e., Aim Risk Profession, Aim Risk Planning, Aim Risk Practices and Aim Risk Processes. AIMRP is nothing but the mirror image of PRMIA.

Intelligent Risk - July 2021

045

calendar of events Please join us for an upcoming virtual course, thought leadership webinar, or virtual event. New offerings are added on a regular basis; watch the PRMIA website at www.prmia.org for updates.

PRM™ SCHEDULING WINDOW July 1 – September 10 COST-BENEFIT METHODOLOGY TO VALUE CLIMATE CHANGE RESILIENCE July 28 – Thought Leadership Webinar MANAGING COMPLIANCE, AUDIT AND RISK MANAGEMENT IN THE CLOUD August 11 – Thought Leadership Webinar PRM TESTING WINDOW August 16 – September 10 CREDIT SENSITIVITY AND ACROSS-THE-CURVE CREDIT SPREAD AXI August 18 – Thought Leadership Webinar

LIVE BRIEFING: ESG DATA MANAGEMENT – A STRATEGIC IMPERATIVE September 14 – Partner event with A-Team Group SUSTAINABLE INVESTMENT FORUM NORTH AMERICA 2021 September 21, 23, 28, 30 – Organized by Climate Action

046

Intelligent Risk - July 2021

047

PRMIA Intelligent Risk - July, 2021

Articles inside

Chapter spotlight: PRMIA New Delhi

Perils of ignoring climate risks - by Dr. K. Srinivasa Rao

R&D metamorphosis within operations division of the banking industry - by Ashwin Baburaj

NSFR: final leg of liquidity regulation by Ashish Deccannawar

The stock market and COVID-19 by Dr. Maya Katenova

Microfinance risk and the future - by Adam Lindquist

Managing financial risks in (re)insurance in the postpandemic world - by Thomas Weber & Jörg Günther

Editor introduction

Archegos: a spectacular failure in risk management by Dan diBartolomeo

U.S. economic recovery mirrored in the stock market by Aleksei Kirilov & Valeriy Kirilov

A tribute in memory of Kalyan Sunderam

PRMIA volunteer spotlight - by Adam Lindquist Oleg Lebedev & Rustum Bharucha