Sefs, Libor fallbacks and risk governance in Asia

The week on, February 9–15, 2019

7 days montage 150219

Giancarlo’s last stand: the race to complete Sef reforms

Part of flagship proposals could be left to his successor, putting their fate in doubt

Apac bank boards: light on experience

A survey of 24 large Apac bank board risk committees shows a dearth of risk managers

A rush on Libor fallbacks to head off holdouts

Concerns that valuation changes will scare some off adoption may be accelerating Isda timeline


COMMENTARY: How not to, vs why not to

This week, a survey of risk committees at 24 Asia-Pacific banks brought some disturbing news – very few committee members have what would seem to be the touchstone for membership – experience as a bank chief risk officer (CRO). Only four, in fact, had a CRO post on their CV, the same number as in two surveys of 15 large global banks in 2012 and 2018 (and therefore a much smaller proportion, being a sample of 24 banks rather than 15).

For Australian banks, in particular, this doesn’t look good. The country’s ‘Big Four’ banks are going through a period of soul-searching after a Royal Commission report earlier this month accused them of pretty much every sort of misconduct it could find a name for. CBA was at the heart of the scandal, as a separate prudential enquiry in 2018 found; its chief executive Ian Narev resigned after the enquiry report was published, and NAB chairman Ken Henry and chief executive Andrew Thorburn followed his lead after the Royal Commission report landed on February 4. Op risk charges rose as well last year, after regulators found risk management deficiencies at CBA.

Banks in the region have been wrestling with conduct risk management for some time now: they avoided the worst of the 2008 financial crisis, but that may have spared them the kind of intense scrutiny US and European banks underwent in the aftermath. It’s only in recent months that this complacent attitude has begun to change in Australia, and other countries in the region may have their own shocks still to come.

It’s worth asking whether, in fact, board risk experience is the right problem to highlight. Without a doubt it’s a good thing for board risk committees to have subject matter knowledge; US bank risk committees populated by museum curators, retired generals, superannuated asset managers, vodka distillers and air conditioning executives were ridiculed for good reason.

But would a risk committee composed entirely of former CROs do any better? Possibly not – at least not in the case of conduct risk. Instead, this might be where a diverse board would come into its own. Study after study has shown that diversity, whether in terms of gender, nationality, culture or educational background, ensures a group makes better decisions; a homogenous group will be prone to groupthink and unethical behaviour. Given that, the worst possible group to supervise the conduct of a bank and its CRO might be a committee of former bank CROs.

Conduct risk losses, as the past 10 years have shown, can be crippling in size and are also immensely damaging to bank reputations. Bank CROs undoubtedly understand how not to do bad things; it is the role of outsiders on risk committees to ensure they remember why they shouldn’t.



Citi’s value-at-risk capital charges soared in the fourth quarter of 2018, with requirements for equity positions alone spiking 49% over the period. The bank’s total VAR-based capital charge hit $461 million at end-December, up $140 million (44%) quarter-on-quarter, and $119 million (35%) on a year ago.



The new generation of machine-learning models, when faced with data increasingly different from the information they were trained on, dial down their confidence level. They will still fail occasionally, but they will “gracefully fade into a fog of ignorance. They will declare upfront that they haven’t got a clue what’s going on”. By contrast, today’s machine learning users “don’t really have a handle on how the models degrade” – Stephen Roberts, Oxford-Man Institute of Quantitative Finance

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