Introduction

The sub-prime contagion and the subsequent credit crunch have been essential in driving banks to reconsider their risk management practices and methodologies. What makes this crisis unique, amongst other things, is the unprecedented volatility that we have seen during 2008. More importantly, this volatility was not limited to any particular asset class, but was evident across the board. Various risks were simply not captured, deemed plausible or accounted for. This has resulted in great pressure both internal and from the regulatory entities all over the world. A lot is still uncertain, i.e. the direction which risk will take and exactly what the different regulatory bodies will require and impose upon the banking industry.

Key findings

• Organisation of market risk – There is a somewhat similar approach at the banks spoken to where market risk is a combination of a control function and a business facilitation unit. This is of no surprise given that business and risk go hand in hand. There is need for the business and risk to have frequent dialogue and well established communication channels.
• Strategy – the participating banks were asked to indicate whether or not they have integrated between their market and credit risk functions. Once again, there is no one size fits all as far as the integration of these two areas is concerned. However, it is important to note that all of the banks spoken to see the merits of such an undertaking and there has been some progress, such as closer communication between the two areas.
• VaR – The most recent and ongoing crisis has highlighted that banks should not rely on one any one single risk metric or tool. The role of VaR has certainly changed, and all of the banks spoken to have raised the importance of stress testing and scenario analysis.

Conclusion

The organisation of market risk is paramount, and this is definitely more so the case in these volatile and turbulent markets where there is a need to prove to investors, regulators and senior management that processes and methodologies are robust and comprehensive. Some of the main challenges being faced were highlighted to be data and quality issues, general contractions across the markets, regulatory pressures and liquidity issues. The role of VaR has changed and VaR as a tool has been under immense scrutiny. The banks spoken to supplement their VaR tool with other metrics/tools, mainly stress testing and scenario analysis. At most of the banks spoken to VaR was not the primary tool in the first place, and there may even be less reliance on this tool in the future.

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Tagged with: 2009, market risk, risk, Risk Research Report