What good are risk disclosures anyway?
Regulatory filings and shareholder reports offered no heads-up of Archegos’ troubles
Regulatory filings and shareholder reports offered no heads-up of Archegos’ troubles
Large banks release thousands upon thousands of pages of information about their risk exposures in shareholder reports and periodic regulatory filings. Scouring these disclosures, as Risk Quantum is wont to do, reveals little about the threat posed by Archegos Capital Management. The family office of former New York hedge fund manager Bill Hwang, which blew up in late March, may inflict losses of up to $10 billion on its roster of bank counterparties, according to JP Morgan analysts.
Archegos itself is out of reach of US regulators. As a family office, it is exempt from most disclosure requirements. That’s a problem in itself, as it impedes analysts’ and watchdogs’ ability to pinpoint the source of certain highly leveraged positions. The UBS Global Family Office 2020 report says 87 of the largest family offices have assets totalling $142.4 billion – a huge blind spot for regulators.
Banks, meanwhile, are subject to a wide range of disclosure requirements. Still, the risk reports of those caught up in the Archegos implosion – Credit Suisse, Nomura, Goldman Sachs, Morgan Stanley and Deutsche Bank being chief among them – shed little light on their exposures to highly leveraged clients.
Yes, it’s possible to track their aggregate derivatives holdings. Among US banks, for instance, regulatory filings show that Goldman Sachs and Morgan Stanley had the largest portfolios of equity swaps – the instruments at the center of the Archegos calamity. But the counterparty credit risk (CCR) posed by derivatives isn’t broken down, making it hard to point to one portfolio over another as especially high risk.
Goldman Sachs, for instance, does not break out CCR exposures related to its trading activities from those linked to traditional lending in its Pillar 3 report. Neither does it segment these by probability of default (PD), like JP Morgan, Citi, and Bank of America. Furthermore, the subsidiary that houses its prime brokerage operations – Goldman Sachs & Co LLC – does not file separate risk reports.
Credit Suisse, in contrast, does break down its CCR by PD – but the data it discloses gives no clue that it had billions in swaps exposure to a highly leveraged investor. As of end-December, the bank said 90% of its CCR exposure to financial institutions covered by its internal risk model – $13.8 billion worth – had a PD of less than 0.15%. Given the size of its projected Archegos loss, it seems highly likely that this position was classified in this 0.15% bucket. Using just the Pillar 3 data, then, it would be impossible to predict that a huge blow-up was likely in the near future.
It may be too much to ask banks to produce more granular risk reports. Concerns that doing so would inadvertently give away the identity of clients and other business secrets are certainly valid. But the Archegos debacle begs two questions. One, are banks accurately filling in their Pillar 3 disclosures? And two, if these disclosures essentially gloss over risks that result in billions of dollars in losses, what good are they anyway?
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Our take
The signs of tacit collusion in the dividend play trade
Game theory and real-world data point to a different understanding of how arbitrage in markets works
Decades of history says you can beat high inflation with quality
Factors such as momentum and value generally outperform the market irrespective of inflation, but new research suggests quality stocks are best when prices are rising rapidly
Esma faces tough task in implementing Emir 3.0
EU regulator must contend with tight timeframes and increasing workload without additional resources
Quants are using language models to map what causes what
GPT-4 does a surprisingly good job of separating causation from correlation
China stock sell-off will test securities firms’ risk managers
Regulatory measures to support stock market could add to risks facing securities sector
Why some UK pensions might choose to run on
Buyouts are booming but trustees are thinking about alternatives, too
Choppy inflation may be the worst inflation
Investors can build strategies to suit fast-rising prices, or slow-rising prices. What trips them up is the inflation foxtrot: slow, slow, quick, quick, slow
A dynamic margin model takes shape
New paper shows how creditworthiness and concentrations can be reflected into margin requirements
Most read
- Top 10 operational risks for 2024
- Regulators’ FRTB estimates based on faulty premise – industry study
- Top 10 op risks: AI fears drive cyber risk to record high