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Resources fo Concentration Risk Management

Concentration Risk Management is a staple of risk management. Open Risk developed a unique and novel set of risk management resources to assist with building in-house knowledge for managing credit concentration risks.

Resources range from courses and online manuals to open source calculators and mobile eLearning games. In this post we have a brief summary of what is available, you can find more details by clicking on the embedded links

Risk modeling is as much art as it is science

The Zen of Modeling aims to capture the struggle for risk modeling beauty

Homo Staticus

The web as we now know it burst first into the open in the early nineties. It certainly did not start among the more socially active classes. It was an invention by and for nerdy CERN physicists, to exchange data about elementary particle experiments. But it wasn’t long before academics figured out additional valuable uses of this technology: You could put your face online, along with a CV. This is how “personal” webpages came to life. Those early home pages were mostly dour affairs, replete with long publication lists.

The mystery of the collapsed cathedral

You walk to the center of an old city, and you see its glorious cathedral lying in ruins. What in the world has happened here? Your investigative instinct goes into overdrive. This is not supposed to happen. Not in peacetime anyway. How can it be that this magnificent edifice, after gracing the town’s central square for who knows how many centuries, is now little more than a rubble pile in the center of town?

You know the periodic table of elements, even if you flunked your science courses! It is the large colorful and blocky table that hanged on every school’s classrooms before becoming yet another mobile app. The periodic table is one of the early and iconic achievements of science. It lists all the pure chemical elements found in nature, the building blocks of all possible material substances. Each block contains a set of numbers that unambiguously characterizes each element and a single or two letter abbreviation for each: H for Hydrogen, He for Helium and so forth, going on for over a hundred different elements. When the periodic table was discovered by Mendeleev (apparently in his dream!) it was an extraordinary realization that the physical world has an underlying order at the microscopic level. In his own words:

Revisiting simple concentration indexes

Our white paper Revisiting simple concentration indexes reviews the definitions of widely used concentration metrics such as the concentration ratio, the HHI index and the Gini and clarify their meaning and relationships.

Visualizing the Stress of US Banks

A recurring cycle of regulatory stress testing exercises has become the new normal in the banking world, at least on the two shores of the northern Atlantic. The periodicity of the European stress testing heartbeat has not yet been firmly established. Did we just miss a beat in 2015 (a so called palpitation) or will the European cycle have two (or more) years periodicity? Who knows. Fortunately, there are no such uncertainties around the US stress testing cycle. The US CCAR rhythm seems to be a very robust annual throb and in March we just got the latest iteration.

Concentrating on Concentration Risk

Senior economists such as Ben Bernanke were still studying the Great 30s Depression when the financial crisis struck in full force circa 2007. Given the complexity of the modern economic and financial landscape compared to the blessed good old days - we have no reports of FWMD (financial weapons of mass destruction) from back then - we can reasonably project that economists will be studying and pontificating on causes and remedies for the current crisis for the next 100 years or so.

Securitisation versus Banking

The ever elusive CMU dream

There is(/was) renewed interest in EU-land over deepening a capital markets union, aka CMU. It is among the initiatives being pursued by the Commission in order to help accelerate growth in the European Union.

The initiative encompasses many elements, both around equity (shares) and debt markets. One important pillar of the CMU aims to re-launch some version of an EU securitisation market. This segment was never really defined in a EU-wide basis. In the pre-crisis European financial landscape there were wide disparities in the degree of adoption, legal frameworks, preferred structures etc. among the different countries comprising the EU. In any case, since the financial crisis there has been a steady decline in securitisation volumes, which amongst others, hinders certain types of exceptional central bank measures (i.e., purchasing securitised assets).

A mini course on risk management, its perils and the silver lining

When talking about risk management, it is not very clear what we are talking about in broad terms, definitely not getting clearer when we start getting into the details and it is even not clear how to best use the (possibly flawed) insights we produce.

We changed the URL structure of the front page to improve readability. This change should not break any links to pages.

If you do notice a problem please let us know at info at openriskmanagement dot com

Criteria for identifying simple, transparent and comparable securitisations

(See BIS D304)

Our view is that securitisation is fundamental financial technology and there is no intrinsic technical reason why it could not be harnessed to best serve the functioning of modern economies.

This page is a summary of a presentation given at the 2014 Autumn TopQuants Meeting, aka, the Open Source Risk Modeling Manifesto.

The dismal state of quantitative risk modeling

The current framework of internal risk modeling at financial institutions has had a fatal triple stroke. We saw in quick sequence: market risk, operational risk, and credit risk measurement failures, covering practically all business models.

In our personal lives, it is the balance between work and life, or the dreadful weight balance. In the professional sphere it might be the balance between debt and equity in the financial industry, or the balance between convenience and citizen privacy in the new tech industry, or the welfare of the many balanced against the property of the few, or finally the geopolitical balance of power of different peoples Balance ensures sustainability as it helps steer away from the risks that lurk at the extremes. It is actually hard to find scenarios in which a balanced approach would not be the optimal way to complete any meaningful journey. Maybe in a world with full visibility and zero risk.

FuriousBanker(TM) helps you learn risk management concepts in a fun and engaging way. This educational game series for mobiles and tablets is developed by Open Risk to enable modern interactive elearning for people working (or aspiring to work) in financial risk management.

The first episode sees FuriousBanker facing The credit detox challenge:

Financial Risk Modelling has suffered enormous setbacks in recent years, with all major strands of modelling (market, credit, operational risk) proven to have debilitating limitations. It is impossible to imagine a modern financial system that does not make extensive use of risk quantification tools, yet rebuilding confidence that these tools are fit-for-purpose will require significant changes. These need to improve governance, transparency, quality standards and in some areas even the development of completely new strands of modelling.

We are happy to publish the first installment of a trilogy that focuses on the risk factors that can turn any credit portfolio toxic.

The first topic is default correlation, a topic that is both core to understanding credit risk and much misunderstood.

Enjoy!

As part of the public beta testing programme, two new Open Risk Academy courses are accessible absolutely free (and with no strings attached :-).

The courses are introductions to measuring credit name or sector concentrations in credit portfolios. They cover the following topics:

• The concept of credit name or sector concentration - what it is and how it can be measured
• The regulatory context and how the issue is covered by requirements and regulatory guidance
• The measurement of credit name or sector concentrations using basic indicators and indexes
• The measurement of credit name or sector concentrations using more advanced (risk based) indicators

The courses run from Oct 7th till Oct 13th. Read more about prerequisites for the courses here:

Open Risk Presentation summarizing the Public Beta Phase

Overview of the motivation for initiating Open Risk and the solutions being delivered in the current phase.

• Venue: Online
• Location: The world
• Time: September 18th 2014
• Link to presentation: Open Risk Overview

The rationale for continuing with internal capital models in the Basel 3 world

Overview of the challenges and opportunities offered by internal capital models (economic capital models) in the post-crisis era. Conference Presentation given at:

• Venue: 2nd Annual Capital Modelling under Basel III (Marcus Evans Conference)
• Location: London
• Time: January 28th 2014
• Link to presentation: Local file