Search Results
Speech
Climate Change and Risk Management in Bank Supervision
Remarks at Risks, Opportunities, and Investment in the Era of Climate Change, Harvard Business School, Boston, Massachusetts.
Newsletter
Central Counterparty Risk Management: Beyond Default Risk
On October 17, 2017, the Federal Reserve Bank of Chicago held its fourth annual Central Counterparty (CCP) Risk Management Conference: Beyond Default Risk. Attendees included representatives from regulators, CCPs, clearing members, and end-user market participants from across North America, Europe, and Asia. Panelists and keynote speakers discussed the challenges for CCPs and market participants that arise from stresses other than a clearing member default
Working Paper
Managing Risk in Cards Portfolios: Risk Appetite and Limits
We describe an important risk management tool at financial institutions, risk appetite frameworks. We observe those frameworks for credit cards portfolios at four large banks and analyze when and why banks adjust them. The risk appetite frameworks for these banks monitor 40 to 150 metrics. We focus on metrics related to outstanding balances of which we identified 79. Overall, we find that these frameworks are sticky. Most adjustments occur during scheduled annual reviews and are relatively limited. Limit breaches are rare. Thresholds are often changed the month after a breach or after the ...
Working Paper
Risk Management and Derivatives Losses
Even though financial risk management has the ability to generate value, the use of financial derivatives among nonfinancial corporations remains limited. We identify a channel that contributes to this limited use: the decoupling of derivatives losses and operational gains. Specifically, firms ex post consider their operational profits separately from their derivatives profits. We explore this phenomenon among firms in Mexico. We use the universe of US dollar Mexican peso currency derivatives transactions in Mexico along with customs data to construct a unique data set on operational exchange ...
Working Paper
Efficient Monte Carlo Counterparty Credit Risk Pricing and Measurement
Counterparty credit risk (CCR), a key driver of the 2007-08 credit crisis, has become one of the main focuses of the major global and U.S. regulatory standards. Financial institutions invest large amounts of resources employing Monte Carlo simulation to measure and price their counterparty credit risk. We develop efficient Monte Carlo CCR estimation frameworks by focusing on the most widely used and regulatory-driven CCR measures: expected positive exposure (EPE), credit value adjustment (CVA), and effective expected positive exposure (EEPE). Our numerical examples illustrate that our ...
Journal Article
Corporate culture in banking
Until recently, regulatory discourse has paid scant attention to the issue of organizational culture in banking. Yet ethical lapses and systematic weaknesses exposed in the 2007-09 financial crisis suggest that future policy dialogue is unlikely to ignore culture?s significance. Drawing from an approach developed in organizational behavior research, the author introduces a framework for diagnosing and changing corporate culture in a way that more effectively supports the bank?s growth strategy and induces behavior that enhances financial stability. The normative exercise, highlighting the ...
Journal Article
Risk management, governance, culture, and risk taking in banks
This article examines how governance, culture, and risk management affect risk taking in banks. It distinguishes between good risks, which are risks that have an ex ante private reward for the bank on a standalone basis, and bad risks, which do not have such a reward. A well-governed bank takes the amount of risk that maximizes shareholder wealth, subject to constraints imposed by laws and regulators. In general, this involves eliminating or mitigating all bad risks to the extent that it is cost effective to do so. The role of risk management in such a bank is not to reduce the bank?s total ...
Briefing
How Does Market Competition Affect Banks' Adaptation to Changes in Flood Risks?
This article examines the interplay between market competition and banks' strategic responses to projected long-term changes in flood risks, using data from the home-equity credit market post-Hurricane Harvey. Our work reveals that banks updated their risk models based on exposure to the hurricane, with those in competitive markets less likely to adopt cautious lending practices. It also explores the concept of strategic complementarity, showing that banks' adaptive behaviors are influenced by their competitors. These findings shed insights on how market forces may influence the way banks ...
Working Paper
Risk Management for Monetary Policy Near the Zero Lower Bound
As projections have inflation heading back toward target and the labor market continuing to improve, the Federal Reserve has begun to contemplate an increase in the federal funds rate. There is however substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In many standard models uncertainty has no effect. In this paper, we demonstrate that the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty. In the current context this result implies that a delayed liftoff is ...
Speech
The Legal Function’s Role in the Risk Management Framework: Jack-of-All-Trades, Cog in the Machine, or Misfit Toy?
Remarks at the BIS Central Bank Legal Experts’ Meeting, Bank for International Settlements, Basel, Switzerland.