Capital buffers, settlement fails and crowd modelling

The week on Risk.net, May 9–15, 2020

7 days montage 150520

Blurred lines in bank capital standards

Boundaries between capital buffers and capital requirements are looking worryingly unclear

CSDR buy-ins – next on the regulatory chopping block?

A big jump in trade fails is adding to doubts about the EU’s settlement discipline regime

Q&A: Ron Dembo on crowd-spotting black swans

Veteran quant argues large groups are better at gauging extreme uncertainty than small teams of experts


COMMENTARY: The unhappy return

By March, it was too late. Decisions taken in January and February by governments around the world had already determined whether their countries would see a few hundred deaths or tens of thousands over the next three months.

March was the month when the financial sector, along with everyone else, was forced to deal with the pandemic as it worsened from day to day. Problems of all kinds broke out. This week, Risk.net looked at the spike in failed repo and securities lending trades, now leading to calls for delays to the European Union’s new settlement discipline rules, and blamed at least in part on the pressures of transitioning to lockdown and remote working. Risk.net also examined the drawdown of capital to support lending – and the concern that in the process capital standards might become divorced from reality.

Now it is May, and in most of the hardest-hit countries, the epidemic has passed its peak, and their governments are moving – more or less reluctantly – towards reopening. It’s absolutely crucial that the next month not be wasted, because it is highly likely that some of these countries are reopening far too soon, and that another wave of infection, of equal or greater size, will hit in a month or two.

Back in March, banks’ disaster recovery plans were not always geared towards a pandemic – they were predicated on a physical disaster, such as a fire or flood, forcing the bank to move en masse to a backup site. Dispersal wasn’t always an option they had considered. There’s no excuse for banks not to be much better prepared by the time the next wave starts to hit hard, in July, August or September.


STAT OF THE WEEK

The eight global systemically important banks in the eurozone put aside €9.7 billion ($10.5 billion) for loan losses in the first quarter, up 42% from the previous quarter. Banco Santander took the largest provisions of the group: €3.9 billion, up 52% quarter on quarter. This included a dedicated €1.6 billion overlay to address losses anticipated because of the coronavirus crisis.

 

QUOTE OF THE WEEK

“The circumstances will stick around in memory for a while, I think. Probably comparable to what the market saw after the 2008 financial crisis. After a long period, we could return to the normal liquidity circumstances we were used to, but I think it will definitely take a [long] time” – Joost de Bakker, Cardano

 

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