Bionic Turtle’s Week in Risk — Ending June 19th

We’ve compiled some great feedback from candidates who took the Part 1 and 2 FRM exams in May! Our forum is also very active again now that candidates are beginning to study for the November exam 🙂

Financial Risk Forum Discussions

FRM and BT

• Nicole’s summary of May 2016 exam: https://www.bionicturtle.com/forum/threads/may-2016-part-1-part-2-exam-feedback.9649/

• Nicole’s helpful blog on utilizing the BT Forum https://www.bionicturtle.com/utilizing-the-bionic-turtle-frm-forum/

Quantitative P1.T2

• Understanding Bayesian A/B testing (using baseball statistics) http://varianceexplained.org/r/bayesian_ab_baseball/ This is a great post (series of posts) on testing posterior distributions because it illustrates some Bayesian concepts concretely (this is the value of code thinking!). He uses the beta distribution to characterize the prior expectations of batting averages; you may recall that in risk, the flexible beta distribution is commonly used to characterize loss given default (LGD). Writes “We’d need to know the probability one beta distribution is greater than another. This question is not trivial to answer, and I’m going to illustrate four routes that are common lines of attack in a Bayesian problem: Simulation of posterior draws; Numerical integration; Closed-form solution; and Closed-form approximation”

Risk

• The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has unveiled an update to its Enterprise Risk Management – Integrated Framework and is seeking public comment of the proposal. Here is the public exposure (132 pp) at http://trtl.bz/21ufutT but here is the shorter (14 pp) Executive Summary at http://trtl.bz/1Y3hhZi

• “Explaining risk management in plain English” by Norman Marks https://normanmarks.wordpress.com/2016/06/12/explaining-risk-management-in-plain-english/ “I have been saying for a while that one of the reasons for the disconnect between senior executives and risk practitioners is the latter’s language. Leaders of the organization speak in plain English about the achievement of corporate objectives such as earnings, profits, and projects. Leaders of the risk management function talk about risks, impact or consequences, and sometimes in technobabble about terms that only risk practitioners and statisticians understand, such as ‘risk capacity’, ‘alpha’, and ‘residual risk’.”
• Aswath Damodaran on How to Invest Internationally https://blogs.cfainstitute.org/investor/2016/06/13/aswath-damodaran-on-how-to-invest-internationally/ “Damodaran also advises investors to distinguish between different types of risk. Continuous risk — the notion that volatility is more extreme in developing markets than in developed ones — is a simple problem for investors since they can factor it into risk premiums. Truncation or discreet risk is the possibility of events like wars or coups. Damodaran warns that this risk is difficult to analyze with the existing tools and cannot be captured by discount rates, so investors should not lump these two types of risk together.”
• Personalities key in shaping banks’ risk taking, study says. The ‘style’ of executives holds more sway than pay or bonuses, research shows https://next.ft.com/content/0116059a-348c-11e6-ad39-3fee5ffe5b5b
• LIBOR, EURIBOR and TIBOR – Taking Stock Half-A-Decade Later https://www.finextra.com/blogposting/12741/libor-euribor-and-tibor—taking-stock-half-a-decade-later Report here at http://trtl.bz/1YzIUaP

• Three Ways to Identify Governance Risk https://blogs.cfainstitute.org/investor/2016/06/16/three-ways-to-identify-governance-risk/ “Before investing, Newton conducts thorough research to analyze and understand a company on three particular levels: 1. Board of Directors: How is the board composed in terms of diversity, tenure, and independence? 2. History: Does the company have a track record of environmental carelessness or infractions? And 3. Culture: How does the firm engage with the community and exercise stewardship over shareholder resources?”

Regulations & Policy

• FASB Rule to Require Banks to Record Projected Loan Losses Up Front http://www.wsj.com/articles/fasb-rule-to-require-banks-to-record-projected-loan-losses-up-front-1466085523 FASB News Release is here at http://trtl.bz/1UFh0sC
• Regulators to Banks: We’ll Size Up Your Risks (WSJ) http://www.wsj.com/articles/regulators-to-banks-well-size-up-your-risks-1465770422 “Since December, the Basel Committee has revised or finalized five different proposals that each essentially would swap out banks’ calculators for regulators’ own. In addition to the rules about calculating their own credit risk from exposure to other banks, large corporations and stockholdings, policy makers are considering capping banks’ exposure to assets such as corporate debt, mortgages, and credit cards. Another proposal would tighten how banks fix the amount of capital they need to protect against possible losses from legal problems or external events like cybercrime.”
• Testimony on “Oversight of the U.S. Securities and Exchange Commission (SEC)” by Chair Mary Jo White https://www.sec.gov/news/testimony/testimony-white-oversight-sec-06-14-2016.html
• The White House hosts a panel: The Future of Finance is Now https://www.whitehouse.gov/blog/2016/06/10/future-finance-now

(Negative) Interest rates

• German 10-Year Government Bond Yields Dip Below Zero as Brexit Fears Hit Market http://www.wsj.com/articles/german-10-year-government-bond-yields-dip-below-zero-for-first-time-1465889491
• Everything You Need to Know About Negative Rates http://www.wsj.com/articles/everything-you-need-to-know-about-negative-rates-1465906559

FinTech

• Fintech Is Ending Money Management as We Know It http://www.bloomberg.com/view/articles/2016-06-08/fintech-is-ending-money-management-as-we-know-it “For those of you who may not have thought much about how technology might affect Wall Street, the work you do each day, and how you do it — not to mention what it means for your careers — this report is invaluable,” says Barry Ritholtz. The report is here at http://trtl.bz/1UJ0pjw
• Latest threat to online lenders: ‘stacking’ of multiple loans http://www.reuters.com/article/us-usa-onlinelending-stacking-idUSKCN0YW0SV This seems like a scary issue for P2P lending. “Running hard checks only at the last minute, however, can also leave other lenders in the dark, said Gilles Gade, president and CEO of Cross River Bank, which invests in many online lending platforms. At that point, the borrower may have already obtained other loans, he said, because hard checks can take about 30 days to show up on a credit report. Another problem: Loans that never show up on credit reports at all, because of uneven reporting by online lenders.”
• The authors of Princeton’s Bitcoin and Cryptocurrency Technologies MOOC (see https://www.coursera.org/course/bitcointech) published a draft book, called Bitcoin and Cryptocurrency Technologies, here at http://trtl.bz/1UhU5zQ
• I think this is useful visual explainer of blockchain technology http://www.recode.net/sponsored/11855666/take-a-closer-look-at-blockchain-technology-infographic

• Accenture’s Technology Vision for Banking 2016 Report (see http://trtl.bz/1WXWSnz) highlights five emerging technology trends shaping the new business landscape: Platform Economy, Digital Trust, Liquid Workforce, Intelligent Automation and Predictable Disruption. Here is the Executive Summary at http://trtl.bz/1XyJBls

Brexit

• Vox explainer: Brexit, the UK referendum that could tear Europe apart, explained http://www.vox.com/2016/6/17/11963668/brexit-uk-eu-explained
• Economists’ rare unity highlights peril of Brexit https://next.ft.com/content/e66852f0-3249-11e6-ad39-3fee5ffe5b5b
• The pessimistic view: ‘Brexit’ could send shock waves across U.S. and global economy https://www.washingtonpost.com/news/wonk/wp/2016/06/18/how-brexit-could-hurt-america/
• Good synthesis by Jeff Miller http://dashofinsight.com/weighing-week-ahead-brexit-vote-mean-financial-markets/

Other

• CFA Exam > The CFA Exam’s Toughest Question: What’s the Payoff? http://www.bloomberg.com/news/articles/2016-06-08/cfa-payoff-elusive-for-legions-crowding-into-its-grueling-exams

• Role of Primary Dealers > Please let’s stop saying US primary dealers are required to make markets (updated) http://ftalphaville.ft.com/2016/06/17/2166705/please-lets-stop-saying-us-primary-dealers-are-required-to-make-markets/ includes link to https://www.newyorkfed.org/markets/pridealers_policies.html (“The primary dealers serve, first and foremost, as trading counterparties of the Federal Reserve Bank of New York (The New York Fed) in its implementation of monetary policy.”)
• Economics > The Behavioral Economics Guide 2016 https://www.behavioraleconomics.com/the-behavioral-economics-guide-2016/ Brilliant introduction discusses prediction bias and the difference between risk and uncertainty
• Exchanges > Upstart IEX Poised for Approval as New Stock Exchange http://www.wsj.com/articles/sec-sta…proval-of-iex-exchange-application-1465923639
• Currency > Good explanation of implications of strong currency: The Losing Battle Against the World’s Most Powerful Currency, The Swiss franc’s persistent strength has posed challenges for export-dependent Switzerland http://www.wsj.com/articles/the-losing-battle-against-the-worlds-most-powerful-currency-1466018375
• Rogue Traders > Société Générale Is Ordered to Pay Trader Who Almost Ruined It http://www.nytimes.com/2016/06/08/business/dealbook/french-bank-is-ordered-to-pay-trader-who-almost-ruined-it.html?_r=0 “The ruling … appears to accept, at least in part, Mr. Kerviel’s argument from the start: namely, that his managers — many of whom quietly left the bank after the scandal — turned a blind eye to his activities and even tacitly encouraged them, as long as his deals were profitable.”
• ERM > FICO to Offer ‘Enterprise Security Scores’ http://blogs.wsj.com/cio/2016/06/14/fico-to-offer-enterprise-security-scores/
• Banking > In case you missed it: What Is a Bank? A series exploring the existential crisis facing banks in 2016 http://graphics.wsj.com/what-is-a-bank/