Samenvatting

Summary - grade 9.5/10 - Financial Risk Managament - Everything included Lectures & Book

0 keer verkocht

Instelling
Erasmus Universiteit Rotterdam (EUR)

Summary including all course information and slides, required for the exam, using only this summary I got the grade of 9.5/10.

[Meer zien]

Voorbeeld 3 van de 19 pagina's

Bekijk voorbeeld

Heel boek samengevat? Nee
Wat is er van het boek samengevat? Chapters relevant for course
Geupload op 14 december 2024
Aantal pagina's 19
Geschreven in 2023/2024
Type Samenvatting

€5,61

In winkelwagen

Opslaan

100% tevredenheidsgarantie
Direct beschikbaar na je betaling
Lees online óf als PDF
Geen vaste maandelijkse kosten

Financial Risk Management – summary

Financial Risk
Different kinds
1 credit risk
2 market risk
3 liquidity risk
4 operational risk

Bank balance sheet
- Short-term debt has increased role
- Trading assets focus is also increasing
- Banks have low equity ratio (5%-8%)

Loans are main asset
= loans and trading assets are often long-term and with limited marketability
Credit risk = risk that counterparties in loan and derivative transactions will default
--> this can wipe out the “loans” and “trading and other assets” part of the assets of a bank
--> provision for loan losses can wipe out equity (if being used)
Market risk = risk that instruments in banks trading book will decline in value

Deposits are main liability
Liquidity risk = risk that bank is unable to meet short-term financial demand
Related to ability to convert assets into cash

Operational risk = risk of loss, resulting from inadequate or failing internal processes, people and systems or from external events
FE: pandemic or geopolitical risks

Financial risk and insolvency
Credit risk, market risk and operational risk can wipe out assets and equity leading to insolvency
Insolvent = not able to pay back debt

1 accounting based
Based on question if liabilities < assets

2 economic based
Based on question if an entity can raise new equity? (from private investor)
--> because banks usually have smaller share of equity equity (5%) so when they lose the 5% of assets, they can have big
value changes

Financial regulation
Why regulation is established
1 maturity mismatch (liquidity risk)
Banks are financed by short term debt (deposits) but they lend on long term
2 bank runs
If you’re last in bank run you will not receive money
3 deposit insurance

4 cheap debt
Because since the insurance the risk is lower and therefore lower interest rate
5 excessive risk (market ad credit risk)

6 systematic risk

7 capital regulation

Capital regulation
Minimum levels of capital that a bank is required to keep
Tier 1 capital = equity
Tier 2 capital = subordinated long-term debt

Financial innovations
= generates new approaches to financial circumstances
FE. new products, services or securities which improve efficiency or transfer risks
Risk can be transferred because it might have different meaning depending on regulation, diversification

Credit default swap = taking out risk of borrower and trading it with another party

Regulatory arbitrage

,Merton H. Miller = “The major impulses to succesful financial innovations have come from regulations and taxes”

Regulatory arbitrage = entering into a transaction or series of transactions, without affecting the risks being taken in order to
reduce regulatory requirements

Types of regulatory arbitrage
1 cross-national regulation race to the bottom
FE: institutions move to countries with low regulation
2 cross-sector fintech
FE: fintech offers a service to the bank and asks for less regulation
3 single-rule securitization, innovation

The stress (=considered risk management failure)
March 2023, Silicon Valley Bank (SVB)faced a depositor run
--> SVB was taken over bij US regulators
--> second largest bank failure in US history
- triggered a stress for multiple mid-sided banks in the uS as well als global banks
- SVB opted to report 43% of assets as HTM
-->depositors of DVB were not giving as much money --> they had to start selling asets --> losses arrived

Bank distress in pandemic
- banks fly to safety
- households were getting money from government, some of this ended up as deposits
- Quantitative Easing (QE)

Quantitative easing
Public sells long-term fixed income assets and stocks (to central bank via dealers)
--> deposits increase from financial institutions and more money becomes available (without being insured)
--> more money available leads to lower interest rate

Longer duration of assets because of forward guidance = constant low-for-longer interest rates at the zero lower bound (ZLB)
Riding the yield curve strategy = if you want to invest for 1 year, you invest in 2-year asset to get higher interest and sell it after 1
year

Interest rate risk
Maturity when all the payments are due (does not take into account when the principle is paid)
Duration = weighted average of the times when payments are received or sensitivity of fixed-interest asset to interest rate changes
--> considers when the money is paid on average, sensitivity on asset when interest rates change

Long-term fixed-rate assets loose value with increasing interest rates
Loss percentage (of total assets) = duration * ∆interest rate

How to account for unrealized losses?
1 at cost for held-to-maturity (HTM) assets
2 market-to-market for available-for-sale (AFS) assets

Deposits and interest rate risk
- deposits are short term
- high switching costs
- banks have market power and do not change deposit rate as much as FED rate (as long as they don’t lose clients)

Deposit franchise value = money a bank makes by paying lower interest rate than market value
-->Deposit franchise hedges interest rate risk in assets

Deposit beta
= the increase in deposit interest rate per increase in short-term interest rate
Deposit beta estimated around 0,3

-->Deposits beta work as hedge as long as there are no bank runs
Unlikely to run:
- Insured depositors

More susceptible to run:
- Uninsured depositors
- Homogenous, well connected depositors (undertake actions together)
- Online depositors (they have easy access and can take action quickly)
--> to prevent banking crisis, regulators invoked the systemic risk exception to protect all deposits

, Financial institutions managing market risk
Two approaches
1 risk decomposition.= tackles risks one by one
2 risk aggregating = aims to get rid of non-systematic risks at portfolio level
-->in practice both approaches are used

Value at Risk (VaR)
Q. what loss level is such that we are X% confident it will not be exceeded in N business days
Q. How bad can things go?

VaR = loss level that will not be exceeded with a specified probability

Gains

Losses

Advantages of VaR
+ captures important aspect of risk in single number
+ easy to understand
+ it asks simple question “How bad can things get?”
+ used extensively in internal risk management

Disadvantages of VaR
- one-dimensional
- creates illusion of control
- susceptible to manipulation

Expected shortfall (ES)
Q. If things do go bad, what is the expected loss?
+ ES is better measure, more dynamical and not only looking at the cut-off
- you need more data to expect ES, so you are more likely to have calculation errors/noise

ES = expected loss given that the loss is greater than the VaR level (c-VaR and Tail Loss)

Coherent risk measures
R (L) = risk of loss L
1 monotonicity = if one portfolio always produces a worse outcome than another, its risk should be greater
R(L1) < R(L2) if L1 < L2

2 transaction invariance = if we add amount cash K (=certain cash payoff) to a portfolio, its risk measure should go down by K
R(L – K) = R(L) – K

3 homogeneity = multiplying size of portfolio by l should result in risk measure being multiplied by l --> not always with VaR
R(lL) = lR(L) for every l > 0

4 subadditivity = risk measures of two portfolios after they merge should be no greater than the some before they merge
R(L1 + L2) ≤ R(L1) + R(L2)

VaR vs. ES
- Regulators want to go from using VaR to ES for determing the market risk capital
- Two portfolios with the same VaR can have very different expected shortfalls

- Var does not necessarily satisfy the 4th condition of subadditivity
- subadditivity criterion: risk can be reduced by diversification
If regulators use non-subadditive risk measure è institution has incentive to break into
subsidiaries
- ES always satisfies all four conditions

Normal distribution assumption
No difference if we have normal distribution, because than the shape of the tail is fixed

Dit zijn jouw voordelen als je samenvattingen koopt bij Stuvia:

Bewezen kwaliteit door reviews

Studenten hebben al meer dan 850.000 samenvattingen beoordeeld. Zo weet jij zeker dat je de beste keuze maakt!

In een paar klikken geregeld

Geen gedoe — betaal gewoon eenmalig met iDeal, creditcard of je Stuvia-tegoed en je bent klaar. Geen abonnement nodig.

Direct to-the-point

Studenten maken samenvattingen voor studenten. Dat betekent: actuele inhoud waar jij écht wat aan hebt. Geen overbodige details!

Veelgestelde vragen

Wat krijg ik als ik dit document koop?

Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.

Tevredenheidsgarantie: hoe werkt dat?

Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.

Van wie koop ik deze samenvatting?

Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper emma79. Stuvia faciliteert de betaling aan de verkoper.

Zit ik meteen vast aan een abonnement?

Nee, je koopt alleen deze samenvatting voor €5,61. Je zit daarna nergens aan vast.

Is Stuvia te vertrouwen?

4,6 sterren op Google & Trustpilot (+1000 reviews)

Afgelopen 30 dagen zijn er 64257 samenvattingen verkocht

Opgericht in 2010, al 15 jaar dé plek om samenvattingen te kopen

Begin nu gratis

Samenvatting

Summary - grade 9.5/10 - Financial Risk Managament - Everything included Lectures & Book

Document informatie

Onderwerpen

Gekoppeld boek

Geschreven voor

Verkoper

Voorbeeld van de inhoud