Although we cannot completely avoid bank risk, we can intelligently try to minimize it.
FORBES: How European Bank Woes Could Wreak Havoc On A Portfolio
The answer is that bank risk-taking was not necessarily excessive from the perspective of the bank stakeholders, since banks were living in a world with private gains but public losses.
The president dubbed his proposals on limiting bank risk the Volcker rule - after Paul Volcker, one of his economic advisors and a former chairman of the Federal Reserve central bank.
"The trading strategy, which was subject to the bank's risk limits and used by many in the marketplace, was based on a legitimate market view that diversified and lowered the bank's portfolio risk during the peak of the financial crisis, " Deutsche Bank's Mr. Golden said in the statement.
At MDE, we have developed a series of strategies that use ETFs and exchange traded options to sculpt risk return payoffs similar to those offered by banks structured products, but without any bank credit risk.
FORBES: How European Bank Woes Could Wreak Havoc On A Portfolio
There may be other ways of achieving your financial goals than relying on bank credit risk.
FORBES: How European Bank Woes Could Wreak Havoc On A Portfolio
These securities are held in a separately managed account and utilize liquid ETFs and exchange traded options, avoiding bank credit risk.
FORBES: How European Bank Woes Could Wreak Havoc On A Portfolio
Most economists expect growth to slow to a still-healthy 9-10% this year, but there are growing concerns that new government limits on bank lending risk choking the economy.
"I have one client who now has more than 10 private bankers, saying he doesn't want to depend on any one bank and risk his assets, " said Kenny Lam, McKinsey's head of Asia private banking.
First, avoid bank credit risk whenever possible.
FORBES: How European Bank Woes Could Wreak Havoc On A Portfolio
"The borrower gets a low interest rate, commensurate with the interest of a conforming loan, and the bank mitigates its risk to some degree, " said Laurie Stewart, the bank's president and CEO.
But Goldman's trading positions were approved by the bank's risk committee, which included all the senior managers.
He failed to insure or "hedge" these transactions, a ploy to maximise profits which exposes the bank to greater risk.
The move by Bank of China may also reflect risk management by the bank itself rather than bigger diplomatic motives.
Possibly, the bank's risk controls were decent enough, but its bosses chose to ignore them for the sake of profits.
Such questions--and the knowledge that many other banks are not asking them--combine to keep the bank's risk managers awake at night.
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Ina Drew, who was chief investment officer, said the bank's risk models were flawed and that some London-based staff hid information from her.
Why should the bank take a risk with its money that the entrepreneur is either unwilling or unable to take him or herself?
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But if the other side of the swap is taken by a hedge fund whose finances are dependent on loans from that same bank, has risk really been transferred?
Liquidity provision by the central bank reduces systemic risk by assuring market participants that, should short-term investors begin to lose confidence, financial institutions will be able to meet the resulting demands for cash without resorting to potentially destabilizing fire sales of assets.
The additional capital requirements in combination with enhanced risk management standards, in theory should lead to reduced risk of bank failures, and should decrease the interdependence between financial institutions, effectively reducing the risk of future banking crises.
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My experience reviewing portfolios of private bank clients suggests that the greatest risk facing these investors is the private bank itself.
First, they want to build statistical models mapping the severity and frequency of past operational risk losses and use this to judge the amount of the bank's capital at risk from operational failures in the future.
The more risk a bank takes, the greater the value of government guarantees and potential bailouts.
In its history, CLS Bank has taken the risk out of foreign exchange transactions among its participants.
And a common deposit-insurance fund could also credibly reduce the risk of bank runs in vulnerable countries.
Dimon replies saying a bank might then reduce risk, make less loans and change the price of loans.
FORBES: Jamie Dimon's Testimony: Volcker Rule May Have Prevented Loss
Asset-management firms that are part of a universal bank are especially at risk from such conflicts of interest.
It speaks vaguely of extending its cover if it can devise some way to share the risk with bank creditors.
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