What are the Potential Pitfalls for Merchants Offering BNPL?

In this episode of Truth in Data, PaymentsJournal discusses potential pitfalls for merchants offering BNPL.

Greensill Capital - many small businesses and thousands of jobs at risk

The potential collapse of Greensill Capital could put many small businesses and thousands of jobs at risk. The supply-chain financier’s troubles highlight overlooked risks in the system.

Greensill Capital has become a dominant player in supply chain finance, a once-staid method of corporate funding that exploded in popularity over the past decade. Lex Greensill has become a dominant figure in an increasingly important, corner of finance. But now, some of his biggest backers have severed ties. 

So, what has gone wrong?

Using techniques mastered by the former "slicers-and-dicers" of subprime mortgages, Greesill transformed the bills it took on into bond-like investments. These could be sold to outside investors, such as hedge funds, desperate to find some yield in a low-interest world. As long as the customers kept settling their invoices, a tidy profit could be made for investors—and the financiers behind all the alchemy. By 2019 Greensill claimed to have arranged financing worth more than $140bn to over 10m customers.

Questions over whether the money would indeed keep flowing were never far away. As concerns mounted over the creditworthiness of the companies Greensill had to collect money from, the value of the bonds underpinned by the invoices wobbled. On March 1st Credit Suisse froze $10bn of funds stuffed with paper sourced by Greensill. The Swiss investment bank warned of  “considerable uncertainties” with respect to the valuation of the bonds linked to Greensill.

Read more from The Economist HERE

How Billionaire Investors Are Protecting Their Wealth

It can take a lifetime to build a fortune of Buffett or Dalio sized proportions.

But, as all billionaires know, there is always risk present in the market – and even though a catastrophic geopolitical or financial event is very unlikely, it is important to be prepared for anything.

The Different Types of Risks Faced by Banks

By  Stanley Epstein -

Banks face a number of different types of risks in their day-to-day business activities. These different risk types and how they arise are not always clearly understood by the public at large, often giving rise to many misconceptions. This article serves to clarify what these risks are and what gives rise to them.

 

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One of the most misunderstood terms, especially when one relates it to banking, is that little word “risk”. Risk and banking seem to automatically go together just like a hand with a glove or Jack pairs with Jill.

Since the 2008 financial crisis and its aftermath, just putting the words “risk” and “bank” together conjures up the image of a monolithic bank rampaging through the economy wreaking havoc as it goes.

This image is of course totally unfair. Banks, like any other firm or even individuals are exposed to many different forms of risk. Banks too, in their own right, are a source of a number of risks as well. However this is outside of our present scope.

This article will explain what risk is and some of the different types of risk that banks and other financial institutions are exposed to in their everyday business activities.

Let us start our journey with a visit to the dictionary. Once upon a time this meant a trip to the bookshelf, but today thanks to the wonders of technology the “word” is at ones fingertips. The definition of “Risk” being “exposure to the chance of injury or loss” is typical (with thanks to Dictionery.com).

There may be other variations on this theme, but what we have is good enough. The key elements of “risk” are EXPOSURE to the CHANCE of LOSS. In other words the possibility that something will cause a financial or other loss. This is the basis for understanding the different types of risks that banks face.

Let us take a look at a typical bank. In its very simplest form, banks take in deposits and lend this out in the form of loans. Should the borrower not repay his or her loan the bank is faced with Credit risk. This is the possibility that a borrower will be unable to make payment of the amount due. Credit risk is absolute. It’s the chance that the borrower will never be able to repay the loan. Credit Risk implies bankruptcy.

Liquidity risk is on the other hand not absolute. It is the possibility that a borrower will be unable to make payment of the amount due at the time that it is due. However the reason for this could be timing issues. In other words he is “illiquid” on the payment due date. It does not imply that the borrower is insolvent as he may be able to repay the loan at a later time.

Between them, Credit risk and Liquidity risk are the major business risks that banks face because they are part and parcel of the business of banking (the loaning out of money).

In recent years there has been a growing realization that Operational risk is another source of danger to a bank. This was given voice and form in the Basel Accords, where Operational Risk has been defined as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events”.

Operational risk can be subdivided into seven distinct categories. In what follows we examine each of these categories and briefly explain what types of risks they cover.
Internal Fraud. Generally this covers fraud by bank staff such as the stealing of assets, theft of client information, covering up errors, intentional mismarking of positions, bribery etc.
External Fraud. Where non-bank staff are involved such as in computer hacking, third-party theft, forgery.
Employment Practices and Workplace Safety. Discriminatory staff policies, workers compensation claims, employee health and safety issues.
Clients, Products and Business Practice. This is a very wide field and generally covers market manipulation, antitrust issues, improper trading activities, bank product defects, fiduciary breaches, account churning. The sub-prime Mortgage debacle is a clear example of a product defect.
Damage to Physical Assets. This covers things like natural disasters, terrorism and vandalism – anything that results in actual damage or destruction of the bank’s physical assets.
Business Disruption and Systems Failures. Power failures, computer software and hardware failures. A hurricane or a flood that results in banking services being disrupted also falls into this category.
Execution, Delivery and Process Management. This covers things like data capture errors, accounting errors, failure to meet legal reporting requirement, negligent loss of client assets.

There are other risks too, such as legal, reputational, market – the list goes on. But that is another story (and perhaps another article).

 

Cash is King

From GARP –

“Cash flow is at the center of a convergence between financial valuation models and risk models that could dramatically alter the credit risk modeling landscape.

Credit risk measurement will soon undergo a sea-change as a result of the growing importance of cash flow analysis, which has been buoyed by new valuation rules.

The traditional credit risk model that has served many FRM practitioners well during the past decade is the PD/LGD/EAD model. Basically, the riskiness of a loan is expressed in three parameters: the probability that the client will default on his obligations (the probability of default, or PD); the financial loss that is incurred in case of a default as a percentage of the exposure (the loss given default, or LGD); and the exposure at default (EAD) – i.e., the remaining principal of the loan, including missed interest payments.”

Read more>> 

If you were a bank, would you lend yourself money?

From Smart Company

What criteria would you use to decide if it’s worth taking the risk of lending yourself money?

If you plan to apply for mortgage finance, be it for your new home or an investment property, it would be helpful to understand the criteria lenders use to assess your loan application to improve your chances of getting the loan that you want.”

read more>>

UBPR: Underused risk management tool that’s free

From ABA Banking Journal

“Bankers seek all sorts of solutions, often at a high price. Don’t ignore one that won’t cost you a dime.

For the last several years I’ve taught an online class for ABA that focuses on a bank’s financial performance, primarily through the use of the Uniform Bank Performance Report. The UBPR is an analytical report based on the quarterly call reports filed with the Federal Financial Institutions Examination Council (FFIEC) by all depository institutions. The reports for thrift institutions, since the passage of Dodd-Frank, contain identical information and formatting as those of commercial banks.”

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