Putting a limit on losses - Revision history

imported>Jeeten.patel@thinkpublishing.co.uk at 15:48, 11 November 2015

2015-11-11T15:48:56Z

← Older revision		Revision as of 15:48, 11 November 2015
Line 114:		Line 114:
	{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"		{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
	\|-		\|-
	! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 2:		! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 2a: Insurance companies'''
	Insurance companies'''
	\|-		\|-
	\| '''Type of risk'''		\| '''Type of risk'''
Line 126:		Line 125:
	\|-		\|-
	{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"		{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
	! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Non-financial companies'''		! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 2b: Non-financial companies'''
	\|-		\|-
	\| style="background:#f2ebef"\|'''Bad debts'''		\| style="background:#f2ebef"\|'''Bad debts'''

imported>Jeeten.patel@thinkpublishing.co.uk at 15:44, 11 November 2015

2015-11-11T15:44:08Z

← Older revision		Revision as of 15:44, 11 November 2015
Line 114:		Line 114:
	{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"		{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
	\|-		\|-
	! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 2: Insurance companies'''		! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 2:
			Insurance companies'''
	\|-		\|-
	\| '''Type of risk'''		\| '''Type of risk'''
Line 125:		Line 126:
	\|-		\|-
	{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"		{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
	\|-
	! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Non-financial companies'''		! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Non-financial companies'''
	\|-		\|-

imported>Jeeten.patel@thinkpublishing.co.uk at 15:41, 11 November 2015

2015-11-11T15:41:35Z

← Older revision		Revision as of 15:41, 11 November 2015
Line 53:		Line 53:
	{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"		{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
	\|-		\|-
	! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 1: Counterparty risk register - banks and shadow banks'''		! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 1: Counterparty risk register - banks and shadow banks'''
	\|-		\|-
	\| '''Type of risk'''		\| '''Type of risk'''
Line 94:		Line 94:
	\| style="background:#e9d7e0"\|'''Letters of credit and bank guarantees receivable, underwriting agreements'''		\| style="background:#e9d7e0"\|'''Letters of credit and bank guarantees receivable, underwriting agreements'''
	\| style="background:#e9d7e0"\|The risk that instruments given by a bank in support of a third-party (reduction of third-party credit risk) will not be honoured.		\| style="background:#e9d7e0"\|The risk that instruments given by a bank in support of a third-party (reduction of third-party credit risk) will not be honoured.
	\| style="background:#e9d7e0"\|~~Any FX~~, ~~equity~~, credit, ~~interest rate~~ or ~~commodity derivative in~~ the ~~money for the corporate, together with purchased options~~.		\| style="background:#e9d7e0"\|LOCs (and similar instruments) and bank guarantees received to cover liabilities or as bid, advance payment or performance guarantees and underwriting agreements. These are only as good as the bank.
			\|-
			\| style="background:#f2ebef"\|'''Letters of credit and bank guarantees payable'''
			\| style="background:#f2ebef"\|The risk that, if a bank which has issued instruments for a third party’s benefit (reduction of own credit risk to a third party) fails, the beneficiary will seek a replacement.
			\| style="background:#f2ebef"\|LOCs (and similar instruments) and bank guarantees given to cover liabilities or as bid, advance payment or performance guarantees and underwriting agreements. Also covers cash used to secure the issuance.
	\|-		\|-
	\| style="background:#~~f2ebef~~"\|'''Failure to lend'''		\| style="background:#e9d7e0"\|'''Failure to lend'''
	\| style="background:#~~f2ebef~~"\|The risk that a bank with an obligation to lend will not do so following failure.		\| style="background:#e9d7e0"\|The risk that a bank with an obligation to lend will not do so following failure.
	\| style="background:#~~f2ebef~~"\|Participation in revolving credit facility, overdrafts, asset finance, supply chain finance, card-acquiring services.		\| style="background:#e9d7e0"\|Participation in revolving credit facility, overdrafts, asset finance, supply chain finance, card-acquiring services.
	\|-		\|-
	\| style="background:#~~e9d7e0~~"\|'''Custodianship failure'''		\| style="background:#f2ebef"\|'''Custodianship failure'''
	\| style="background:#~~e9d7e0~~"\|The risk that investments are not delivered when required.		\| style="background:#f2ebef"\|The risk that investments are not delivered when required.
	\| style="background:#~~e9d7e0~~"\|Most investment arrangements, including segregated cash, repos, money market fund assets as well as investment funds.		\| style="background:#f2ebef"\|Most investment arrangements, including segregated cash, repos, money market fund assets as well as investment funds.
	\|-		\|-
	\|}		\|}
Line 145:		Line 149:
	* Overall group;		* Overall group;
	* Subordination within legal entity;		* Subordination within legal entity;
	* Instrument, especially to capture the liquidity of the instrument; and Maturity, to cover the time over which the risk occurs.		* Instrument, especially to capture the liquidity of the instrument; and
			* Maturity, to cover the time over which the risk occurs.
	A further dimension to consider is type of counterparty. For example, when measuring investments, types might include:		A further dimension to consider is type of counterparty. For example, when measuring investments, types might include:
	* Commercial banks;		* Commercial banks;
Line 172:		Line 177:
	\|-		\|-
	\| style="background:#f2ebef"\|'''Debt prices'''		\| style="background:#f2ebef"\|'''Debt prices'''
	\| style="background:#f2ebef"\|The price of bank debt (for example, bonds, commercial paper, money market pricing) will reflect the market view of the bank's credit risk. The higher the yield, the greater the risk. This can form part of an assessment of a 'market-implied rating' where a certain yield implies a certain rating, whatever the actual rating is.		\| style="background:#f2ebef"\|The price of bank debt (for example, bonds, commercial paper, money market pricing) will reflect the market view of the bank's credit risk. The higher the yield, the greater the risk. This can form part of an assessment of a 'market-implied rating' where a certain yield implies a certain rating, whatever the actual published rating is.
	\|-		\|-
	\| style="background:#e9d7e0"\|'''Credit default swap (CDS) price'''		\| style="background:#e9d7e0"\|'''Credit default swap (CDS) price'''

imported>Doug Williamson: Protected "Putting a limit on losses" (‎[edit=sysop] (indefinite) ‎[move=sysop] (indefinite))

2015-07-27T12:56:02Z

Protected "Putting a limit on losses" (‎[edit=sysop] (indefinite) ‎[move=sysop] (indefinite))

← Older revision	Revision as of 12:56, 27 July 2015
(No difference)

imported>Jeeten.patel@thinkpublishing.co.uk at 12:18, 24 November 2014

2014-11-24T12:18:35Z

imported>Jeeten.patel@thinkpublishing.co.uk at 16:29, 1 November 2014

2014-11-01T16:29:09Z

← Older revision		Revision as of 16:29, 1 November 2014
Line 156:		Line 156:
	\|-		\|-
	\| '''Data piece'''		\| '''Data piece'''
	\| '''Description and comment''''		\| '''Description and comment'''
	\|-		\|-
	\| style="background:#e9d7e0"\|'''Credit rating'''		\| style="background:#e9d7e0"\|'''Credit rating'''
Line 171:		Line 171:
	\|-		\|-
	\| style="background:#f2ebef"\|'''Fundamental analysis'''		\| style="background:#f2ebef"\|'''Fundamental analysis'''
	\| style="background:#f2ebef"\|Proper ~~funamental~~ analysis is almost certainly beyond the capability of most treasuries, but simple measures of balance sheets can be made, such as the leverage measure used by regulators. One problem with this type of analysis is that it is out of date very quickly.		\| style="background:#f2ebef"\|Proper fundamental analysis is almost certainly beyond the capability of most treasuries, but simple measures of balance sheets can be made, such as the leverage measure used by regulators. One problem with this type of analysis is that it is out of date very quickly.
	\|-		\|-
	\|}		\|}

imported>Jeeten.patel@thinkpublishing.co.uk at 16:27, 1 November 2014

2014-11-01T16:27:50Z

← Older revision		Revision as of 16:27, 1 November 2014
Line 108:		Line 108:
	\| '''Explanation'''		\| '''Explanation'''
	\|-		\|-
	\| style="background:#e9d7e0"\|'''~~Clam~~ failure'''		\| style="background:#e9d7e0"\|'''Claim failure'''
	\| style="background:#e9d7e0"\|The risk that an insurance company fails before a ~~clam~~ is paid.		\| style="background:#e9d7e0"\|The risk that an insurance company fails before a claim is paid.
	\| style="background:#e9d7e0"\|All insurance contracts.		\| style="background:#e9d7e0"\|All insurance contracts.
	\|-		\|-

imported>Jeeten.patel@thinkpublishing.co.uk at 16:26, 1 November 2014

2014-11-01T16:26:31Z

← Older revision		Revision as of 16:26, 1 November 2014
Line 85:		Line 85:
	\|-		\|-
	\| style="background:#e9d7e0"\|'''Letters of credit and bank guarantees receivable, underwriting agreements'''		\| style="background:#e9d7e0"\|'''Letters of credit and bank guarantees receivable, underwriting agreements'''
	\| style="background:#e9d7e0"\|The risk that instruments given by a bank in support of a ~~thrid~~-party (reduction of third-party credit risk) will not be honoured.		\| style="background:#e9d7e0"\|The risk that instruments given by a bank in support of a third-party (reduction of third-party credit risk) will not be honoured.
	\| style="background:#e9d7e0"\|Any FX, equity, credit, interest rate or commodity derivative in the money for the corporate, together with purchased options.		\| style="background:#e9d7e0"\|Any FX, equity, credit, interest rate or commodity derivative in the money for the corporate, together with purchased options.
	\|-		\|-

imported>Jeeten.patel@thinkpublishing.co.uk at 16:25, 1 November 2014

2014-11-01T16:25:04Z

← Older revision		Revision as of 16:25, 1 November 2014
Line 21:		Line 21:
	\|datastyle = padding-top:7px; padding-bottom:5px;;		\|datastyle = padding-top:7px; padding-bottom:5px;;

	\|header1 = ~~Authors~~		\|header1 = Author
	\| label1 =		\| label1 =
	\| data1 =		\| data1 =
	\|header2 =		\|header2 =
	\| label2 = Will Spinney		\| label2 = Will Spinney
	\| data2 = Associate ~~director~~ of ~~education~~		\| data2 = Associate Director of Education
	at the ACT		at the [http://www.treasurers.org/ ACT]

	\|belowstyle = background:#ddf;		\|belowstyle = background:#ddf;

imported>Jeeten.patel@thinkpublishing.co.uk at 11:10, 29 September 2014

2014-09-29T11:10:26Z

← Older revision		Revision as of 11:10, 29 September 2014
Line 151:		Line 151:


	~~[[File~~:Figure-3-~~Treasury~~-~~Essentials~~.~~jpg~~\|~~900px~~\|~~center]]~~		{\| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
			\|-
			! colspan="4" style="color:#48001f; font-size:18px; background:none" \| '''Figure 3: Measuring bank credit risk'''
			\|-
			\| '''Data piece'''
			\| '''Description and comment''''
			\|-
			\| style="background:#e9d7e0"\|'''Credit rating'''
			\| style="background:#e9d7e0"\|Every bank is rated and the rating agencies specialise in credit risk assessment. they have been known to be slow to react to events, however and bank failures happen very quickly. As well as the rating itself, both long-and short-term, the outlook should also be considered.
			\|-
			\| style="background:#f2ebef"\|'''Debt prices'''
			\| style="background:#f2ebef"\|The price of bank debt (for example, bonds, commercial paper, money market pricing) will reflect the market view of the bank's credit risk. The higher the yield, the greater the risk. This can form part of an assessment of a 'market-implied rating' where a certain yield implies a certain rating, whatever the actual rating is.
			\|-
			\| style="background:#e9d7e0"\|'''Credit default swap (CDS) price'''
			\| style="background:#e9d7e0"\|The CDS price reflects the price of credit in the same way that bank debt does, but is arguably more liquid and immediate than debt prices, thus adding signalling power.
			\|-
			\| style="background:#f2ebef"\|'''Share price'''
			\| style="background:#f2ebef"\|The share price is an easily available measure that can be expected to react quickly to events and so has high signalling power.
			\|-
			\| style="background:#f2ebef"\|'''Fundamental analysis'''
			\| style="background:#f2ebef"\|Proper funamental analysis is almost certainly beyond the capability of most treasuries, but simple measures of balance sheets can be made, such as the leverage measure used by regulators. One problem with this type of analysis is that it is out of date very quickly.
			\|-
			\|}

← Older revision		Revision as of 12:18, 24 November 2014
Line 35:		Line 35:
	==Introduction==		==Introduction==
	Counterparty risk has increased in importance since the financial crisis. Indeed, in many surveys of treasurers, it is cited as one of the top three risks facing the treasurer or company. That’s not to say that the subject was not considered important prior to the crisis – it was, but it was just not assessed with the same rigour seen today.		Counterparty risk has increased in importance since the financial crisis. Indeed, in many surveys of treasurers, it is cited as one of the top three risks facing the treasurer or company. That’s not to say that the subject was not considered important prior to the crisis – it was, but it was just not assessed with the same rigour seen today.


	Two major factors are behind this increased focus on counterparty risk. Firstly, the creditworthiness of banks has fallen as they are no longer seen as incapable of failure. Secondly, there is a rise in cash holdings by many of the world’s corporations (both large and small) as they hold back on capital expenditure in an uncertain economic environment and protect against future liquidity risk. Investing cash is probably the most obvious activity where counterparty risk is considered. It is by no means the only one, however, and banks are not the only class of counterparty where risk arises.		Two major factors are behind this increased focus on counterparty risk. Firstly, the creditworthiness of banks has fallen as they are no longer seen as incapable of failure. Secondly, there is a rise in cash holdings by many of the world’s corporations (both large and small) as they hold back on capital expenditure in an uncertain economic environment and protect against future liquidity risk. Investing cash is probably the most obvious activity where counterparty risk is considered. It is by no means the only one, however, and banks are not the only class of counterparty where risk arises.


	Counterparty risk is the risk that a counterparty to a contract will not perform their part of the contract, such as repay a deposit of cash, settle an invoice or supply goods when due. This is called ‘default risk’. It also refers to how much of the contract is performed. In some defaults, all the amounts at risk might be received (for example, in a secured lending), or just some might, or indeed none at all. The total amount of funds lost is known as ‘loss given default’.		Counterparty risk is the risk that a counterparty to a contract will not perform their part of the contract, such as repay a deposit of cash, settle an invoice or supply goods when due. This is called ‘default risk’. It also refers to how much of the contract is performed. In some defaults, all the amounts at risk might be received (for example, in a secured lending), or just some might, or indeed none at all. The total amount of funds lost is known as ‘loss given default’.


	In this article, we will look at how counterparty risk arises, how we might measure it and, finally, how we might manage it.		In this article, we will look at how counterparty risk arises, how we might measure it and, finally, how we might manage it.


	Before we can establish a policy for managing counterparty risk, such as setting an objective and assigning responsibilities, we need some way to measure these risks. There are two key dimensions to this. Firstly, we must measure the size of the risk. Secondly, we must measure the likelihood of default and any subsequent loss.		Before we can establish a policy for managing counterparty risk, such as setting an objective and assigning responsibilities, we need some way to measure these risks. There are two key dimensions to this. Firstly, we must measure the size of the risk. Secondly, we must measure the likelihood of default and any subsequent loss.

Line 146:		Line 154:
	==Measurement of likelihood of default and loss given default==		==Measurement of likelihood of default and loss given default==
	This measurement is arguably more challenging and amounts to an assessment of credit risk of the counterparty. We will restrict ourselves to measuring bank credit risk, although the same principles broadly apply to other types of counterparty.		This measurement is arguably more challenging and amounts to an assessment of credit risk of the counterparty. We will restrict ourselves to measuring bank credit risk, although the same principles broadly apply to other types of counterparty.


	A particularly useful way to analyse some of this data is to use it against a benchmark of the sector. So if, for example, the CDS price of a bank was rising (worse credit risk) faster than its peers, that would be a warning sign. Similarly, if the share price was falling (worse risk) faster than its peers, that would also be a warning sign.		A particularly useful way to analyse some of this data is to use it against a benchmark of the sector. So if, for example, the CDS price of a bank was rising (worse credit risk) faster than its peers, that would be a warning sign. Similarly, if the share price was falling (worse risk) faster than its peers, that would also be a warning sign.

Line 188:		Line 198:
	Limits should be aggregated across the company so that limits are not broken by two parts of the organisation acting independently.		Limits should be aggregated across the company so that limits are not broken by two parts of the organisation acting independently.
	Risks should be measured on a regular basis and there should be an ability to react to changes in risk quickly, bearing in mind how quickly banks, in particular, can fail. Some companies use a traffic light system, based on a combination of the measures in the table above left, which can be used as a trigger for action.		Risks should be measured on a regular basis and there should be an ability to react to changes in risk quickly, bearing in mind how quickly banks, in particular, can fail. Some companies use a traffic light system, based on a combination of the measures in the table above left, which can be used as a trigger for action.


	It is impossible to eliminate credit risk, but a company should understand the risks it faces and be in control of them.		It is impossible to eliminate credit risk, but a company should understand the risks it faces and be in control of them.

	[[Category:Book_Export]]		[[Category:Book_Export]]