Remittance flows to developing countries are expected to decline by 7.3% in 2009, according to World Bank estimates released at the July 13-14 International Diaspora and Development Conference in Washington DC. According to the World Bank, remittances are relatively resilient because, while new migration flows have declined, the number of migrants living overseas has been relatively unaffected by the crisis. However, sources of risk to the outlook include uncertainty about the depth and duration of the current crisis, unpredictable movements in exchange rates, and the possibility that immigration controls may be tightened further in major destination countries.
Click on the Post Title to link to the article.
Tuesday, 14 July 2009
Monday, 13 July 2009
Download the CA DIGEST here!
We have just published the new edition of the CA DIGEST.
Download it by clicking the Post Link.
Whats the lead story? Why there is no need for a Basel III plus all the latest on Payment Systems, Operational Risk, Remittances and much, much more.
Friday, 10 July 2009
Mobile Money Summit
There was some interesting stuff at the recent Mobile Money Summit in Barcelona. More than a billion people worldwide lack bank accounts, but do have mobile phones. This creates a dramatic opportunity to achieve greater financial inclusion. It is really worthwhile to follow events at the summit. Have a look at http://www.mobilemoneysummit.com/presentations.shtml or click through on the title of this post.
You have to register to get access. However this is free, and it is certainly worth the effort.
You have to register to get access. However this is free, and it is certainly worth the effort.
Wednesday, 8 July 2009
Managing Liquidity Risk – The 2007 Crisis
By Stanley Epstein - Principal Associate & Director of Citadel Advantage
This is the first of a series of articles on Liquidity and Liquidity Risk that we shall be publishing over the next few months.
The whole question of Liquidity Risk Management has become very topical of late spurred on by the initial liquidity crisis in 2007, which occurred in the early stages of the subsequent financial collapse. More and more frequently I find myself being asked the same question or a variation of it “what is the best way to ensure that my bank’s Liquidity Risk Management is on a sound basis?”
The subject is vast. And depending on exactly what you are trying to achieve, so too are the answers.
Before even attempting to paint a broad picture as to the key issues to be addressed in ensuring sound Liquidity Risk Management, I would like to take a step or two back – and explain some of the key principles and issues the surround liquidity management.
Liquidity in the first instance depends on the exact use that the word is being put to. Let me explain. In a pure sense liquidity is defined as the ease and certainty with which an asset can be converted into cash. Money, or cash on hand, is the most liquid asset. Market liquidity on the other hand is the term that refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value of the underlying asset. Accounting liquidity is a measure of the ability of a debtor to pay their debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities.
In banking and financial services, liquidity is the ability of a bank (or other financial organization) to meet its commitments when they fall due. Managing liquidity is a daily process (in fact in today’s real-time world, this has become a real-time process too) requiring bankers to monitor and project cash flows to ensure that adequate liquidity is maintained. In a banking environment that liquidity may be needed to fund customer transfers and settlements or to meet other demands generated by the banks business with its clients (advances, letters of credit, commitments and other business transactions that banks undertake).
There are many other definitions of liquidity too. Suffice to say that the brief summary above should serve to explain the concept and to illustrate the notion that there are many variations of this.
Almost every financial transaction or financial commitment has implications for a bank's liquidity. Liquidity risk management helps make certain of a bank's ability to meet cash flow obligations. Remember that this ability can be severely affected by external events and the behavior of other parties to the transaction. Liquidity risk management is critical because a liquidity shortfall at a single bank can have system-wide repercussions, called systemic risk. The inability of one bank to fund, for example, its end-of-day payment system obligations could have a knock-on effect on other banks in the system, which could lead to financial collapse. Indeed, the central bank, as the lender of last resort, stands ready with a safety net to help out individual banks (or even the greater “system”). We witnessed this on a massive scale over the past two years in the U.S., Europe, Asia and elsewhere. However getting this assistance often carries an almost impossible price – reputation. Banks that get themselves into this sort of trouble pay a terrible price in terms of the loss of confidence amongst members of the public, investors and depositors alike. Often this price is so high that the stricken bank does not recover.
The market chaos that began in mid-2007 brought into very sharp focus the importance of liquidity to the effective functioning of financial markets as well as the banking industry. Before the crisis, asset markets were buoyant and funding was readily available at low cost. The sudden change in market conditions clearly showed just how quickly liquidity can disappear and that the lack of liquidity (the correct term is illiquidity) can last for a very long period of time indeed.
So we arrive at the summer of 2007. From August onward the worldwide banking system came under severe stress. To make matters worse developments in financial markets over the previous decade had increased the complexity of liquidity risk and its management. The result was widespread central bank action to support the functioning of money markets and, in some cases, individual banks as well.
It was pretty clear at this point that many banks had failed to take account of a number of basic principles of liquidity risk management. Why? Well in all probability, in a world where liquidity was plentiful and cheap, it didn’t seem to matter much.
Many of the banks that carried the greatest exposure did not even have an adequate framework that satisfactorily accounted for the liquidity risks required by their individual products and business lines. Because of this, incentives at the business level were out of alignment with the overall risk tolerance of these banks.
Many of these banks had not really considered the quantity of liquidity they might require to meet contingent obligations because they simply dismissed the notion of ever having to fund these obligations as being highly unlikely.
In a similar vein many banks saw as highly unlikely too, any severe and prolonged liquidity disruptions. Neither did they conduct stress tests that took account of the chance of a market wide crisis (that is one that affects the whole industry rather than just a single other participant) or the depth or duration of the problems. Banks also did not link their plans for contingency funding to the results of their stress tests. And to add insult to injury they also sometimes assumed that irrespective of what happened their traditional funding sources would remain available to them.
With these events still fresh in the minds of banks and bank regulators the BIS (Bank for International Settlements) based “Basel Committee on Banking Supervision” published a document entitled “Liquidity Risk Management and Supervisory Challenges” during in February 2008.
The crisis had revealed many of the critical issues, outlined above, that had patently been overlooked. Based on this, the Basel Committee has conducted a basic review of its earlier “Sound Practices for Managing Liquidity in Banking Organisations”, which had been published in 2000. In their new document their guidance has been significantly expanded into eight key areas. These key areas cover the following principles;
This is the first of a series of articles on Liquidity and Liquidity Risk that we shall be publishing over the next few months.
The whole question of Liquidity Risk Management has become very topical of late spurred on by the initial liquidity crisis in 2007, which occurred in the early stages of the subsequent financial collapse. More and more frequently I find myself being asked the same question or a variation of it “what is the best way to ensure that my bank’s Liquidity Risk Management is on a sound basis?”
The subject is vast. And depending on exactly what you are trying to achieve, so too are the answers.
Before even attempting to paint a broad picture as to the key issues to be addressed in ensuring sound Liquidity Risk Management, I would like to take a step or two back – and explain some of the key principles and issues the surround liquidity management.
Liquidity in the first instance depends on the exact use that the word is being put to. Let me explain. In a pure sense liquidity is defined as the ease and certainty with which an asset can be converted into cash. Money, or cash on hand, is the most liquid asset. Market liquidity on the other hand is the term that refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value of the underlying asset. Accounting liquidity is a measure of the ability of a debtor to pay their debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities.
In banking and financial services, liquidity is the ability of a bank (or other financial organization) to meet its commitments when they fall due. Managing liquidity is a daily process (in fact in today’s real-time world, this has become a real-time process too) requiring bankers to monitor and project cash flows to ensure that adequate liquidity is maintained. In a banking environment that liquidity may be needed to fund customer transfers and settlements or to meet other demands generated by the banks business with its clients (advances, letters of credit, commitments and other business transactions that banks undertake).
There are many other definitions of liquidity too. Suffice to say that the brief summary above should serve to explain the concept and to illustrate the notion that there are many variations of this.
Almost every financial transaction or financial commitment has implications for a bank's liquidity. Liquidity risk management helps make certain of a bank's ability to meet cash flow obligations. Remember that this ability can be severely affected by external events and the behavior of other parties to the transaction. Liquidity risk management is critical because a liquidity shortfall at a single bank can have system-wide repercussions, called systemic risk. The inability of one bank to fund, for example, its end-of-day payment system obligations could have a knock-on effect on other banks in the system, which could lead to financial collapse. Indeed, the central bank, as the lender of last resort, stands ready with a safety net to help out individual banks (or even the greater “system”). We witnessed this on a massive scale over the past two years in the U.S., Europe, Asia and elsewhere. However getting this assistance often carries an almost impossible price – reputation. Banks that get themselves into this sort of trouble pay a terrible price in terms of the loss of confidence amongst members of the public, investors and depositors alike. Often this price is so high that the stricken bank does not recover.
The market chaos that began in mid-2007 brought into very sharp focus the importance of liquidity to the effective functioning of financial markets as well as the banking industry. Before the crisis, asset markets were buoyant and funding was readily available at low cost. The sudden change in market conditions clearly showed just how quickly liquidity can disappear and that the lack of liquidity (the correct term is illiquidity) can last for a very long period of time indeed.
So we arrive at the summer of 2007. From August onward the worldwide banking system came under severe stress. To make matters worse developments in financial markets over the previous decade had increased the complexity of liquidity risk and its management. The result was widespread central bank action to support the functioning of money markets and, in some cases, individual banks as well.
It was pretty clear at this point that many banks had failed to take account of a number of basic principles of liquidity risk management. Why? Well in all probability, in a world where liquidity was plentiful and cheap, it didn’t seem to matter much.
Many of the banks that carried the greatest exposure did not even have an adequate framework that satisfactorily accounted for the liquidity risks required by their individual products and business lines. Because of this, incentives at the business level were out of alignment with the overall risk tolerance of these banks.
Many of these banks had not really considered the quantity of liquidity they might require to meet contingent obligations because they simply dismissed the notion of ever having to fund these obligations as being highly unlikely.
In a similar vein many banks saw as highly unlikely too, any severe and prolonged liquidity disruptions. Neither did they conduct stress tests that took account of the chance of a market wide crisis (that is one that affects the whole industry rather than just a single other participant) or the depth or duration of the problems. Banks also did not link their plans for contingency funding to the results of their stress tests. And to add insult to injury they also sometimes assumed that irrespective of what happened their traditional funding sources would remain available to them.
With these events still fresh in the minds of banks and bank regulators the BIS (Bank for International Settlements) based “Basel Committee on Banking Supervision” published a document entitled “Liquidity Risk Management and Supervisory Challenges” during in February 2008.
The crisis had revealed many of the critical issues, outlined above, that had patently been overlooked. Based on this, the Basel Committee has conducted a basic review of its earlier “Sound Practices for Managing Liquidity in Banking Organisations”, which had been published in 2000. In their new document their guidance has been significantly expanded into eight key areas. These key areas cover the following principles;
- banks need to determine how much liquidity risk they are prepared to accept,
- banks must keep a level of liquidity commensurate with their needs,
- the costs of liquidity must be allocated to the banks business activities,
- all the liquidity risks must be identified and measured,
- tests that simulate extreme conditions must be developed and used,
- liquidity contingencies must be planned for,
- intraday liquidity risk must be managed, and
- open disclosure is supported as a method for sustaining market discipline.
So what is this new guidance all about? I will be covering Basel Committee’s advice on these key issues and the subsequent industry response in more detail in a series of subsequent articles.
Tuesday, 7 July 2009
Online Scams Jump as More Africans Go Online
New technology comes at a price. This interesting article in PC World is a warning that all is not gold at the end of the technology rainbow (Remember to click on the Post Title to view). Mobile payment developers and banks who are venturing into this area for the first time should take note.
Friday, 3 July 2009
European Commission sets out technology-driven action plan for derivatives trading
I am always concerned when we try to solve our problems (or simply wish them away) by invoking “technology” as the panacea. So seeing the headline “European Commission sets out tech-driven action plan for derivatives trading” on an e-mail alert from Finextra brings to mind all the previous misguided attempts to solve everything by throwing technology at it.
(Please click on the Post Title to read the article)
We have previous attempts to manage operational risk by “mining” historic loss data (which often did not exist in digital form anyway) and using this as an indicator of the future losses or the over reliance of VAR. Interestingly, Pablo Triana in his book “Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?” aptly compares VAR to a passenger airbag that works only 95% of the time; unfortunately the other 5% includes the time when the driver is involved in an accident.
In dealing with Money Laundering we really threw the baby out with the bathwater when we abrogated the requirement to “Know your customer” from a real personal knowledge of who your customer was and what his business really was about to the technologists black box and the modern alchemist’s book of formulae and often erroneous suppositions.
I most certainly agree that derivatives and credit default swaps have created a web of mutual dependence that makes it difficult to understand, disentangle and contain risk in the immediate aftermath of a default. I am all for using technology to improve the situation.
However, I do really fear that unless we really have a clear understanding of the derivative practices and processes and the potential implications, throwing all this technology at it could end up as a huge waste of money.
(Please click on the Post Title to read the article)
We have previous attempts to manage operational risk by “mining” historic loss data (which often did not exist in digital form anyway) and using this as an indicator of the future losses or the over reliance of VAR. Interestingly, Pablo Triana in his book “Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?” aptly compares VAR to a passenger airbag that works only 95% of the time; unfortunately the other 5% includes the time when the driver is involved in an accident.
In dealing with Money Laundering we really threw the baby out with the bathwater when we abrogated the requirement to “Know your customer” from a real personal knowledge of who your customer was and what his business really was about to the technologists black box and the modern alchemist’s book of formulae and often erroneous suppositions.
I most certainly agree that derivatives and credit default swaps have created a web of mutual dependence that makes it difficult to understand, disentangle and contain risk in the immediate aftermath of a default. I am all for using technology to improve the situation.
However, I do really fear that unless we really have a clear understanding of the derivative practices and processes and the potential implications, throwing all this technology at it could end up as a huge waste of money.
Thursday, 2 July 2009
David Alexander on Ponzi Fraud
South Africa has its own Ponzi scheme too. A 2 billion rand (USD 257 million) scam that has ensnared many investors, including some well known local businessmen. Please click on the Post Title to link to a transcript of a radio interview that local fraud expert David Alexander did yesterday on South Africa’s Moneyweb Radio.
David Alexander is the Guest Expert at the CIT-Advantage Seminar in Johannesburg on 25/26 & 27 August 2009 on “RISK MANAGEMENT - CASE STUDIES FROM THE 2008 CRISIS”. David Alexander’s unique combination of business experience and insights into scams, fraud and social engineering through personal exposure has equipped him to provide unique insights and cutting edge, innovative social engineering, scam, fraud and economic crime solutions.
David Alexander is the Guest Expert at the CIT-Advantage Seminar in Johannesburg on 25/26 & 27 August 2009 on “RISK MANAGEMENT - CASE STUDIES FROM THE 2008 CRISIS”. David Alexander’s unique combination of business experience and insights into scams, fraud and social engineering through personal exposure has equipped him to provide unique insights and cutting edge, innovative social engineering, scam, fraud and economic crime solutions.
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