The importance counterparty risk Part-1

Despite the efforts made by financial institutions to ensure compliance with the Basel 2, the internal audits and supervisory bodies highlight gaps in devices management. Beyond the third scoring models in place to comply with regulations (Basel II and Solvency II in particular), financial institutions must continue efforts to ensure a sustainable level of quality control and so effectively and Reliable customer risk. If there are relatively simple and fast to improve data quality, only a comprehensive approach and equipped keeps this level over time and create a culture of quality in financial services, with the image of the industry.

The banking and financial regulation on the internal control of credit institutions and investment firms provides an outline of points to watch it should be integrated within the device management of counterparty risk. To ensure compliance with regulations and ensure the proper level of control internally, branches wish to have the core quality indicators ensuring the validity of the information system risk management, validating the defined risk strategy and organization established to cover the risk client. The only way to dispose of is to use information systems to provide a quantitative analysis, but the relevance of these indicators is based on the quality of the IS.

System-level information, the presence of duplicates, unreliable links or combination obsolescence of customer identification are some of examples of non-referential quality of the third most frequently cited. If they do not prevent the IF function, these problems can have a significant impact on end users and in particular the process of consolidating risks, commercial pilot, the fight against money laundering and grant decisions. Shares of reliability, often initiated by the trades and in consultation with the project owners, are intended to identify areas of non-quality, identify the causes and identify pragmatic ways to mitigate or delete.

The first actions are almost always in the form of manual corrections. These projects mobilize substantial charges to align the repository with the reality-duplication, enhancement or correction of signs, etc ... In addition, these actions if they can have a satisfactory short-term, must be renewed frequently to maintain quality and fight against the progressive drift.

The key points of the implementation in PRC Part.II

Pressed for time; many institutions, even of large size, so consider the use of market solutions. However, uncertainties remain to be addressed regarding the maturity of the editors on this subject, including the ability to manage solutions in standard multiple levels of consolidation within international institutions. Nevertheless, difficulties in producing reliable and comprehensive reports on time are perhaps to be expected.

Reporting related to the Cooke ratio was traditionally produced and controlled by the Finance Department. However, since the implementation of Basel II and McDonough, new entities are involved in solvency calculations which are at the heart of the PRC.

This is the case of Risk Department, which focused knowledge of the risk-weighted assets for credit risk and operational risk (part of the calculation of McDonough). But it is also the case for Directions marketing, which often position themselves as providers of the data used for scoring Basel counterparts (also conditions the new ratio, for institutions using the "IRB").

It is therefore necessary to define now the control process and clarify the appropriate "service agreements" between the various entities. Indeed, the solvency ratio is at the heart of communication facilities and must follow a control circuit, validation, monitoring and operation, prior to its release or its internal operational use. In addition, aspects related to training will not be negligible in the success of the PRC, each actor in the "production line" to control the origin and impact of data it processes.

Therefore, the use of XBRL (data interchange format for technical interoperability) does not appear to be at the heart of the concerns of the banks. After all, it is only a computer translation of functional data model. This language is, moreover, already common in some international companies for internal reporting...

The key points of the implementation in PRC Part.I

Generally described as a technical project, including the use of exchange format "XBRL" PRC also includes business and organizational issues are often overlooked. Yet they are at least as important and appear to be at the heart of institutional concerns. The establishment of "production lines" PRC, as well as has responsibility for validation and controlling data, indeed require special attention.

From a business perspective, it is primarily the availability and reliability of data on the scope anticipated at the heart of the concerns. On the one hand, Basel II, which must come to power PRC data are not yet stabilized for most institutions (upgrades following the regulator's audits, review the quality of some data, adjusting assumptions modeling, implementation delayed for certain subsidiaries ...). On the other hand, some data expected by the PRC are not provided in standard areas of specific ventilation, presence of aggregates under Pillar II, or references to IAS
A "simple" translation between the PRC and the Basel II appears to be excluded, especially since it must incorporate data from the subsidiaries. The complexity of implementation is also increased for banking groups with entities abroad. In Europe, there will be no one single reporting. On the basis of a reference format defined by the CEBS, each national supervisor has established its own version of the PRC. Therefore, the parent company cannot simply broadcast a unique methodology and to manage complex rules for consolidation and verification. A true "challenge" for groups ADDITION consolidating subsidiaries is not subject to the PRC, nor even to Basel II.

Once key issues arise with regard to functional architecture; indeed, the options selected will be structural, not only because the PRC requires complex treatment (IRB cohabitation methods and standard collection of market risk, high volume ...) but also because it will be necessary to ensure the sustainability of production assumptions (audit ability and interpretability of data on the long term).

Subprime Loans and Crisis Management Part.3

In addition to the survival of the funds involved, the correction of the subprime loans crisis in the United States require "the finest tuning" in order not to fall from bad to worse:

* A massive intervention on behalf of borrowers bail out banks would prevent restoring forces to play their role in the crisis and resume cyclically in a few years.
* Conversely, an inadequate response - but allowing to clear the financial sector by eliminating litigation - would have a major impact on the U.S. economy, the real estate sector (in a city or 20% of loans are subprime, a price collapse would contaminate all borrowers), but also on consumption, the main engine of growth.

The consequences of this crisis will be dramatic for the hundreds of thousands of U.S. borrowers who find themselves in a situation of bankruptcy. The impact should also be very important on the U.S. economy, leading to a likely recession. The direct impact on the global economy has yet to understand the difficulties encountered in three areas.

(I) First of all in asset management systems credit derivatives played their part in spreading the risk. The investors then faced most of the losses.

(Ii) Then the current problems on the short-term liquidity should not continue, the central banks play their role as lender of last resort, and investors rediscovering the charm of the short-term investments.

(Iii) Finally, the credit business knows the beginning of a "flight to quality" that can only be healthy; all observers have denounced the excesses for several months, particularly in terms of investment funds whose growth should slow. You still have to remember that the currently observed spreads are still well below what they were from 2000 to 2001.

Nevertheless it is expected, in continental Europe, that governments use the crisis to demand an additional transparency on Asset Management. However, these trades have become so technical that it is difficult to make them accessible to the uninitiated to measure the risks actually incurred by the funds...

Subprime Loans and Crisis Management Part.2

In recent past the two assumptions above are not true:

* Declining housing market reduces the value of the mortgaged property falls below the debt
* Rising interest rates makes debt burden too heavy for a fragile population.

Moreover, these loans were sold with an initial period of 2 or 3 years with a fixed prime. Loans issued in 2004 and 2005 (time of highest award) so arrive at the end of this period and must be reattached in 2007, triggering a wave of defaults.
If the mechanism occurs on a large scale, the financial institution as a whole is threatened.


To optimize their use of capital, banks that granted these loans have securitized all or part of their subprime loans primarily through CDO or RMBS and this, with the blessing of most credit rating agencies.
Yields offered have attracted all investors: hedge funds but also the more traditional asset managers. Funds that meet today's challenges are mainly dynamic money market funds, which could offer higher yields, not more sophisticated hedge funds.

Defects increasing the sub primes, the value of credit derivatives is greatly reduced. The managers are then unable to calculate the value of their background, including lack of exchange of the instruments. They then suspend trading, causing investor panic. They wish to sell then all turn, forcing managers to temporarily close the funds until better days.

The funds that have affected not closed had to find cash to meet withdrawals; they then sold the only liquid assets, the shares resulting in lower market share.

Finally, some banks are highly exposed through their funds (including the German bank Sachsen LB, IKB, BBW, etc...) Must meet their losses and introduce and suspicion on the entire area causing tensions in the interbank market.