Low Interest Rates

The Search for the Elusive Natural Interest Rate (The concept guides central bankers like Janet Yellen, but the rate can’t be directly observed) http://www.bloomberg.com/news/articles/2016-07-22/the-search-for-the-elusive-natural-interest-rate “The Fed aims to set short-term interest rates in relation to the natural rate–the one that would produce full employment without excess inflation.”

Death of the risk-free rate http://trtl.bz/death-riskfree-rate “Abandoning the assumption of a positive risk-free rate alters our conceptions of money, monetary policy, and investment risk. Managing volatility, the traditional measure of risk, may now prevent us from achieving our investment objectives … Are these default-free negative real rates of interest [really] risk free?”

Forecasting Interest Rates over the Long Run http://trtl.bz/nyfed-forecasting-rates “As we explained in our previous post, term premia compensate investors for bearing interest rate risk. Term premia also vary over time, reflecting the changing magnitude of investor compensation for those risks. As a result, the presence of term premia confounds the inferences that one might make about the market-implied expectation for the path of interest rates when looking at current rates. Term structure models allow analysts to decompose observed interest rates into the expected path of short-term interest rates over the life of the bond and the term premium.” This post includes a link to their previous article which has a more basic discussion about the Expectation Theory of interest rates, which has a pure version (i.e., forward rates are unbiased predictors of future spot rates) and a more realistic Biased Expectations Theory


May you live in “exciting” times! An Updated Picture of Country Risk by Aswath Damodaran http://trtl.bz/damodaran-country-2016-july-update “It is a good time to update my global country risk database and the paper that goes with it, and in this post, I would like to focus on updating numbers and providing risk pictures of the world, as it looks today.” Please note this refers to a current P1.T4 FRM reading assignment: Aswath Damodaran’s “Country Risk: Determinants, Measures and Implications – The 2015 Edition.” Here is the updated paper (Country Risk: Determinants, Measures and Implications–The 2016 Edition): http://trtl.bz/damodaran-country-risk-july-2016-update

How the world’s sovereign bonds stack up (The BlackRock Sovereign Risk Index helps us assess various government bonds. Richard discusses some of the notable changes in the recently updated ranking) https://www.blackrockblog.com/2016/07/22/worlds-sovereign-bonds-stack/

Economies in the triple-A club https://www.weforum.org/agenda/2016/07/what-is-triple-a-credit-rating “There are very few countries that belong to the AAA club. At the moment they are Australia, Canada, Denmark, Germany, Hong Kong, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland; and, until very recently, the UK. Hong Kong, which has Special Administrative Region status, has its own credit rating (AAA, from S&P). Some countries are close to the mark. The United States, for instance, was downgraded by S&P in 2011, but retains its Aaa/AAA from the other agencies.”

Climate and Water Risk

Too hot to work? What climate change means for jobs https://www.weforum.org/agenda/2016/07/too-hot-to-work-what-climate-change-means-for-the-economy

Climate Change: Why Financial Institutions should take note http://globalriskinstitute.org/publications/climate-change-why-financial-institutions-should-take-note/

Mapping Water Risk Around the World http://googlemapsmania.blogspot.com/2016/07/mapping-water-risk-around-world.html and What You Need to Know About the World’s Water Wars (Underground water is being pumped so aggressively around the globe that land is sinking, civil wars are being waged, and agriculture is being transformed) http://news.nationalgeographic.com/2016/07/world-aquifers-water-wars/


Goldman Sachs Starts to Look More Ordinary http://www.wsj.com/articles/goldman-sachs-profit-revenue-beat-expectations-1468928398

The problems at Deutsche Bank http://www.johnkay.com/2016/07/22/the-problems-at-deutsche-bank/ “The key to a high return on equity is to have little equity in your capital base – to have very high leverage – and Deutsche Bank achieved this to more dramatic effect than any large company in history.”

Europe’s next crisis is Renzi and the banks (A fight in Brussels over the fate of Italy’s troubled financial system is prelude to a long, hot political autumn in Rome)http://www.politico.eu/article/europes-and-matteo-renzis-italian-problem/ Related: These Sicilian Mortgages Show How Difficult It Is to Rescue Italian Banks http://trtl.bz/sicilian-mortgages “Italian bankruptcy proceedings last an average of 7.8 years, compared to an average of just over two years for the rest of Europe.”

The Bank of Central Banks Reveals the Biggest Threat to the Global Financial System http://johnfmauldin.tumblr.com/post/147748534236/the-bank-of-central-banks-reveals-the-biggest

Governance and ERM

These business titans are teaming up for better corporate governance http://trtl.bz/wapo-titans-governance The site is here http://www.governanceprinciples.org/and here is the report http://trtl.bz/ceo-governance-principles-july-2016

Welcome to Risk Accounting (Academics have codified a new accounting technique that could revolutionize enterprise risk management)http://ww2.cfo.com/management-accounting/2016/06/welcome-risk-accounting/


Using the Z-Score to Assess the Risk of Bankruptcy (Interview with Edward Altman, creator of Z-Score) http://www.aaii.com/journal/article/using-the-z-score-to-assess-the-risk-of-bankruptcy

Analyzing Banks’ Credit Risk: Expectations for New Accounting Guidance http://trtl.bz/cfa-mi-credit-new-guidance “In today’s reporting environment, analyzing the credit risk of bank assets is hampered by the delayed write-down of loans, the incomparability of how loan carrying values are measured, and inconsistencies in the classification of loans as non-performing. For this reason, stakeholders, including investors, have been keenly waiting for the revised accounting guidance under both US GAAP and International Financial Reporting Standards (IFRS).”

Operational risk and Case Studies

A VaR Standard for Cyber and Operational Risk http://www.garp.org/#!/risk-intelligence/detail/a1Z400000036794EAA The Factor Analysis of Information (FAIR) methodology by http://www.risklens.com/ is an international standard Value at Risk (VaR) model for cyber security and operational risk. Here is more about FAIRhttp://www.fairinstitute.org/learn-fair

HSBC forex traders charged with criminal fraud (DoJ alleges $8m profit was made at the expense of UK client) https://next.ft.com/content/9c44fe7a-4e97-11e6-8172-e39ecd3b86fc

What is ‘front running’ and why is there a crackdown on currency traders? (HSBC case has put the global forex market back in the spotlight)https://next.ft.com/content/9a09df46-4f18-11e6-88c5-db83e98a590a and this by Matt Levine (who is always good) http://www.bloomberg.com/view/articles/2016-07-20/hsbc-currency-traders-got-greedy-on-christmas “Knowing that a client might buy 2.25 billion pounds in the next week is an interesting data point. Knowing at 2:28 p.m. that the client will buy 2.25 billion pounds at exactly 3 p.m. is, you know, Christmas.”

Inside the High-Profile Downfall of a $8 Billion Hedge Fund http://trtl.bz/downfall-eight-billion-hedge

Banks Still Facing ‘Heavy Costs’ for Misconduct: Report www.law.com/sites/articles/2016/07/18/banks-still-facing-heavy-costs-for-misconduct-report/ Here is the report http://trtl.bz/conduct-costs-ccp-2015

Settlement Ends Much of Litigation Against MF Global’s Corzine http://www.wsj.com/articles/settlement-ends-much-of-litigation-over-mf-global-collapse-1469120431 the MF Global case assigned in the 2014 FRM as a Current Issue

Was Tumblr the worst acquisition of the decade? http://www.businessinsider.com/scott-galloway-tumblr-worst-acquisition-of-decade-2016-7

VW Emissions Cheating Ran Deep and Wide, State Alleges http://www.wsj.com/articles/vw-emis…ed-widespread-new-n-y-lawsuit-says-1468938468

Regulations and Regulators

When Bank Capital Standards Aren’t Actually That Standard http://www.bloomberg.com/news/articles/2016-07-18/when-bank-capital-standards-aren-t-actually-that-standard “While such rules set a minimum required capital level for banks, countries retain leeway in calculating the ratio by which that level is achieved — allowing for tinkering in the numerator (definition of capital) and the denominator (risk-weighted assets).”

The OFR Introduces Interactive U.S. Money Market Fund Monitor https://financialresearch.gov/money-market-funds/ “A lack of detailed data about fund holdings blocked regulators from seeing risks quickly in 2008. Since then, regulators have begun to require funds to report detailed data about their holdings more frequently. Funds are also required to hold more liquid assets.”


What Every FinTech CEO Should Know About Risk Management https://www.finextra.com/blogposting/12867/what-every-fintech-ceo-should-know-about-risk-management “What is Risk Management? First, what risk management is not: it is not about avoiding risk at all costs. That is a recipe for immediate bank failure. Remember the point above – banking is the business of managing financial risk on other people’s behalf. Avoiding risk simply means receiving no revenue.”

It Takes a Village to Manage Operational Risk https://www.finextra.com/blogposting/12881/it-takes-a-village-to-manage-operational-risk “Data-driven operational risk management is absolutely critical. Regulators expect it, boards and shareholders expect it, and it significantly impacts the bottom line because of risk-adjusted capital requirements, and actual losses … For too long, operational risk management has been characterized by qualitative, rather than quantitative methods.

What’s Fintech? Nasdaq and KBW Offer an Answer With a New Index http://www.wsj.com/articles/whats-fintech-nasdaq-and-kbw-offer-an-answer-with-a-new-index-1468950444 Here is the methodology http://trtl.bz/KFTX-methodology

Amazon Tiptoes Into Banking Business Through Student Loans (Wells Fargo to offer discounts to customers of the online retailer)http://www.wsj.com/articles/amazon-tip-toes-into-banking-business-1469093403 Good commentary here http://www.consumerreports.org/student-debt/amazon-student-loans-wells-fargo/ and here is the offering http://amzn.to/29U8hDj

InsurTech- Why Insurance is next prime focus? https://thoughtxy.wordpress.com/2016/05/04/fintech-why-insurance-is-next-prime-focus/ and Insurtech: Evolving Insurance Business models https://thoughtxy.wordpress.com/2016/05/21/insurtech-evolving-insurance-business-models/

Loan Registry Seeks to Tame Marketplace Lending Frontier (Risk and compliance veterans put forward a trust and verification system based on loan validation techniques) http://www.garp.org/#!/risk-intelligence/detail/a1Z400000036JxL


Stop pretending America’s housing boom had nothing to do with lending standards http://ftalphaville.ft.com/2016/07/20/2170108/stop-pretending-americas-housing-boom-had-nothing-to-do-with-lending-standards/

The Risk Oil Drillers Couldn’t Hedge Away (Failing drilling companies lose valuable insurance that would protect them against falling oil prices)http://www.bloomberg.com/news/articles/2016-07-21/the-risk-oil-drillers-couldn-t-hedge-away I think this statement is inaccurate: “Put simply, Linn’s bankers had two losing bets at once.” Rather, to me it looks like the bankers had right-way risk: credit exposure positively (negatively) correlated with credit quality (default probability).

Here’s Why CFA Could Become The New MBA http://www.businessbecause.com/news/business-finance-masters/4074/heres-why-cfa-could-become-new-mba

The relativity of raw data http://simplystatistics.org/2016/07/20/relativity-raw-data/ “Raw data is relative to your reference frame. In other words the raw data is raw to you if you have done no processing, manipulation, coding, or analysis of the data. In other words, the file you received from the person before you is untouched. But it may not be the rawest version of the data. The person who gave you the raw data may have done some computations. They have a different raw data set.”


Q&A with Spencer Jakab author of “Heads I Win, Tails I Win” http://abnormalreturns.com/2016/07/13/qa-with-spencer-jakab-author-of-heads-i-win-tails-i-win/

The End of Accounting (Investors are poorly served by arcane accounting methods, a new book argues. New ways are needed to measure companies’ performance)http://www.wsj.com/articles/the-end-of-accounting-1466529229

Three basic mistakes people make at casinos, according to a math expert https://www.washingtonpost.com/news/wonk/wp/2016/07/13/the-scientific-way-to-win-in-vegas/ “A third psychological quirk which pops up a lot in games is what’s known as gambler’s ruin. This is the tendency where if people win at a game, they increase the amount of money they’re risking. But often when people lose, they don’t decrease the amount that they’re risking. Mathematically, this will always lead you to bankruptcy.”

Book Review: The Econometrics of Individual Risk https://blogs.cfainstitute.org/investor/2016/07/21/book-review-the-econometrics-of-individual-risk/ “The sophistication necessary to apply these techniques may be beyond the statistics expertise of the typical CFA charterholder, but a working knowledge of quantitative credit analysis has become critical for success in the credit asset class. Evaluating quantitative assessments of credit risk may be too important to be left to the quants.”

Practical Risk Analysis for Project Planning: A Hands-On Guide (Practical Analytics) http://amzn.to/2a7FZUI


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