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Iason Pills
EBA Publishes its Work Programme for 2022
Executive Summary
- Work Programme 2022
- Priorities for 2022
Topics
Supervision/Resolution, Data Quality, Stress Test, FinTech, AML/CFT
EBA Risk Dashboard Points to Stabilising Return on Equity in EU Banks but Challenges Remain for those Banks with Exposures to the Sectors Most Affected by the Pandemic
Executive Summary
- EBA Published its Risk Dashboard for the Q2 of 2021
- Main Evidences
Topics
Capital, Credit Risk, Profitability, Liquidity Risk, Operational Risk
FSB: Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements: Progress Report on the Implementation of the FSB HighLevel Recommendations
Executive Summary
- Progress Report Main Findings
- FSB High-Level Recommendations
Topics
Stablecoin
The EBA Publishes its Regular Monitoring Report on Basel III Full Implementation in the EU
Executive Summary
- Overall Methodology Approach
- Overview of the Results
Topics
Market and Counterpart Risk, Credit Risk, Operational and IT risk, Capital and Leverage Ratio, Large Exposure, Liquidity Risk
Just in Time
ECB Economy-wide Climate Stress Test: Methodology and Results
Executive Summary
The main contribution made by this paper is the development of a centralized (top-down) economy-wide climate stress test that assesses the resilience of NFCs and euro area banks to transition and physical risk, applying a range of assumptions in terms of future climate policies. The stress test presented here comprises three main pillars. First, climate-specific scenarios identify future projections of climate and macroeconomic conditions over the next 30 years. Second, a comprehensive dataset combines climate and financial information for millions of companies worldwide and maps them to banks through granular loan and security holdings. Third, the specific transmission channels of climate risk drivers for firms and banks are captured thanks to a novel set of climate-specific models.
The Use of AI and ML by Market Intermediaries and Asset Managers: IOSCO Final Report Review
Executive Summary
IOSCO about the use of AI and ML by Market intermediaries and Asset Managers identifies: - 6 Main Risk and Harms - 5 Potential Mitigations - 6 Measures to tackle the risks What emerges from the Final Report is a guidance that seeks to address the potential risks and harms that may be caused by the use of AI and ML by market intermediaries and asset managers. Even if not yet binding, the framework is strongly encouraged to ensure a robust and efficient governance.
EBA Analysis of RegTech in the EU Financial Sector: Deep Dives into RegTech Segments
Executive Summary
The EBA reports identifies five areas with a relevant impact from RegTech solutions. In the previous JIT an overview of the main segments has been given. This work focuses on AML/CFT, fraud prevention and prudential reporting areas.
Big Data and Artificial Intelligence: Principles for the Use of Algorithms in Decision-making Processes
Executive Summary
On June 2021, BaFin published supervisory principles for the use of algorithms in decision-making processes by financial institutions. Those principles are intended to promote the responsible use of big data and artificial intelligence (BDAI) and facilitate control of the associated risks. This paper is intended to offer guidance to the institutions supervised by BaFin. In addition, BaFin hopes that the paper will stimulate discussion with European Commission and European Supervisory Authorities (ESAs).
EBA Analysis of RegTech in the EU Financial Sector
Executive Summary
In line with the financial industry trends, the European Banking Authority (EBA) has been focused on the technological innovations and how their applications can either foster or harm market participants and Supervisory organizations. Since the Article 31 of the European Banking Authority (EBA) Founding Regulation (EU) No 1093/2010, EBA has aimed to contribute to the establishment of a common European approach towards technological innovation which can facilitate the adoption of new technologies by the Financial Institutions and Providers (FinTech), Regulators (RegTech) and Supervisory organizations (SupTech). On the other hand, one of the main concerns of the Authority is to establish robust oversighting frameworks to control and mitigate possible risks that could arise from new approaches. In this regards, EBA started a monitoring process on the usage of new technologies and methodologies to analyze their effect, in terms of both benefits and possible risks. The objective is to set the scene for the future policy discussions within the wider objectives of facilitation of innovation and aim to assist the European Commission’s objectives included in the Digital Finance Strategy.
FATF Evidences on Money Laundering from Environmental Crime
Executive Summary
Environmental crime has brought results exceeding the financial costs, including for the planet, public health and safety, human security, and social and economic development. The work presents the evidences collected by FAFT with regard to Money Laundering from the so-called phenomenon of "green" crime. In detail, it shows the features of financial flows in this context and the challenges that should be managed by the States.
EBA 2021 EU‐wide Stress Test
Executive Summary
Initially scheduled for 2020 but postponed by 1 year as part of the temporary relief measures decided by the EBA, due to the pandemic, 2021 EU-wide stress test involves 50 banks from 15 EU and EEA countries, covering 70% of the EU banking sector assets. This year's stress test is characterised by a specific scenario that assumes a prolonged Covid-19 scenario in a "lower for longer" interest rate environment: Very severe having in mind the weaker macroeconomic starting point in 2020; Drop of GDP in three years by 3.6% in the EU, while the unemployment peaks in 2023 at 12.1%. The results show a high CET1 depletion close to 500 bps, but banks finish the exercise above 10% ratio on average. Credit risk remains the main driver, but there is a higher impact on NII compared to previous stress tests. The results also show dispersion across banks. Banks more focused on domestic activities or with lower net interest income (NII), display a higher depletion.
EBA Report on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms
Executive Summary
The EBA has received several mandates to assess how to include Environmental, Social and Governance (ESG) risks into the three pillars of the banking prudential framework. This report assesses their potential inclusion in Pillar 2 by providing: • The relevance and uniform definition of ESG factors and ESG risks; • A non-exhaustive list of quantitative and qualitative definitions, indicators and metrics, together with a description of several tools and methodologies that can support the identification, evaluation and assessment of ESG risks; • The incorporation of ESG risks in the institution’s business strategy and business processes and in their internal governance and risk management frameworks; effective way to proportionately reflect ESG risks in the supervisory review for credit institutions.
ESG: Climate-related Risk and Financial Stability
Executive Summary
The work presents recent progress in the ECB's quantitative work to map and monitor financial system exposures to climate change transition and physical risks and to measure bank vulnerabilities to climate-related risks, complemented by analyses of the role played by the financial system in the transition to a greener economy. Moreover, it covers the stress-test and scenario analysis sections of the ECB report "Climate-related risk and financial stability", which deepens quantitative insights for the European Union, following a growing body of international research focused on the impacts of climate change on financial stability. The forward-looking assessments of financial losses building on the scenarios substantiate both credit risk of banks and market risk of insurers and investment funds. The climate stress tests show consistently that disorderly transition and hot house world scenarios would lead to higher loan defaults and asset valuation losses. The analyses are intended to assist the orderly transition to a greener economy, while avoiding larger shocks or abrupt changes in the financial system stemming from climate-related risks.
ESG: EBA - Mapping Climate Risk: Main Findings from the EU-wide Pilot Exercise
Executive Summary
As the EU taxonomy and climate risk stress test frameworks are still developing, the EBA ran a pilot exercise, designed as a learning exercise to investigate how existing and newly developed climate risk assessment and classification tools perform, and to test banks' readiness to deal with related data and methodological challenges. Therefore, the exercise, which was run on a sample of 29 volunteer banks, provides an indicative picture of the main challenges that supervisors and banks are facing in identifying the greenness of activities, classifying and measuring climate risks, and should support banks in their transition efforts. According to the outcome of the mapping exercise, more than half of banks' exposures (58% of total non-SME corporate exposures to EU obligors) are allocated to sectors that might be sensitive to transition risk, and are concentrated in some specific sectors.
SFDR: The European SFDR Regulation on ESG Disclosure in Finance
Executive Summary
The regulation on disclosure of ESG characteristics of financial investments, addressed to asset managers, product farms and financial advisors, is evidence of the European Authorities’ efforts to formalize technical standards into a universe of relatively new products. As a matter of fact, in this framework standards and indicators are yet to be involved in the long run process of assimilating conventional financial data, therefore challenges in data management will have to be faced in the implementation of the regulation. This work aims to summarize the objectives, salient features and open points of the legislation and to explain the related problems.
ESG: BIS – Climate-related Risks – Measurement Methodologies and their Transmission Channels
Executive Summary
The document gives an overview of conceptual issues related to climate-related financial risk measurement and methodologies, as well as ESG risks transmission channels and some practical implementation by banks and supervisors. It is based on BIS (Climate-related financial risks – measurement methodologies) and BCBS (Climate-related risk drivers and their transmission channels) papers from April 2021, which widely resume the literature state of art of environment risk qualification and quantification, providing a high-level overview of strengths and weaknesses of the main types of measurement approaches and assessing gaps and challenges in their execution and implementation.
Machine Learning e Model Risk Management
Executive Summary
È stato dimostrato che gli algoritmi di apprendimento automatico (ML) superano in molte situazioni i modelli tradizionali in termini di potere predittivo e sono in grado di elaborare grandi quantità di dati non strutturati e provenienti da varie fonti. Attualmente le tecniche di ML vengono utilizzate principalmente ai fini di analisi esplorativa dei dati e di modeling, con netta preferenza per il primo ambito rispetto al secondo. Partendo dal white paper di Model Risk Managers’ International Association (MRMIA) «MACHINE LEARNING AND MODEL RISK MANAGEMENT» , il presente documento sintetizza e reinterpreta le principali implicazioni nell’uso dei modelli di ML ai fini di Validazione Interna e gestione del Rischio Modello, evidenziandone i punti di forza e le potenziali debolezze anche e soprattutto rispetto ai modelli tradizionali attualmente in uso nelle istituzioni finanziarie.
Climate Stress Test Banque de France's First Pilot Exercise: Main Results and Methodology - Focus on Transition Risk
Executive Summary
The climate pilot exercise conducted between July 2020 and April 2021 by the Autorité de contrôle prudentiel et de résolution (ACPR – the French Prudential Supervision and Resolution Authority) is an important step in supervising climate change-related risks. This is the first time that a supervisory authority has performed a bottom-up climate-related stress test exercise as comprehensive and demanding as this one, based on a risk assessment directly conducted by the financial institutions and insurers under its responsibility on the basis of common assumptions. The purpose of this document is to summarize and analyze the main methodological aspects and results published by Banque De France, with a specific focus on the banks’ exposure to the Climate Transitions risk.
Climate Change Risks: Overview, Supervisory Expectations and Implications for Financial Institutions
Executive Summary
In the 2015 Paris Agreement national governments agreed to strengthen the global response to climate change by introducing policies to improve the transition to low-carbon and more circular economies on a global scale and to limit the global temperature increase below 2° C (target 1.5°C). Following this path, the European Union launched the European Green Deal to make its economy sustainable and become the first climate-neutral continent by 2050. Given both market and regulatory expectations, the main purpose of this document is to provide an overview on the implications and challenges that can derive from the integration of the climate and environmental risks into the already existing bank’s processes, with particular attention on the impacts in the risk management frameworks. Leveraging on experience and advanced skills, Iason can provide support to its Clients by developing new tools and strategies to handle with both data and methodology challenges, together with end-to-end support in the governance of the projects.
Targeted Review of Internal Models: Focus on Credit Risk
Executive Summary
Following the financial crisis of 2007-09, concerns were raised regarding the unwarranted variability of the outputs of models used to calculate regulatory capital requirements. The TRIM project was a large-scale multi-year supervisory initiative launched by the ECB at the beginning of 2016 in close cooperation with NCAs that are part of European banking supervision in order to confirm the adequacy and appropriateness of approved Pillar I internal models used by SIs in euro area countries, ensuring their compliance with regulatory requirements and harmonize supervisory practices relating to internal models within the SSM. The findings communicated within TRIM have been followed up with binding supervisory decisions requesting the institutions to address these shortcomings within set timelines. It is estimated that the aggregated impact of TRIM limitations and model changes approved as part of TRIM will lead to a 12% (+€275 billion) increase in the aggregated RWA covered by the models in scope of TRIM of which more than 90% due to credit risk supervisory measures. TRIM has improved the comparability of outcomes of internal models used by SIs and has contributed to the harmonization of the supervisory practices trough the development of the ECB Guide to internal models.
ECB Guide on Climate-Related and Environmental Risks: Supervisory Expectations
Executive Summary
This guide outlines the ECB’s understanding of the safe and prudent management of climate-related and environmental risks under the current prudential framework. It describes how the ECB expects institutions to consider climate-related and environmental risks – as drivers of existing categories of risk – when formulating and implementing their business strategy and governance and risk management frameworks. It further explains how the ECB expects institutions to become more transparent by enhancing their climate-related and environmental disclosures.
Targeted Review of Internal Models: Focus on Market Risk and Counterparty Credit Risk
Executive Summary
Under the standards issued by the BCBS, as implemented in European Union legislation, banks are allowed to employ internally developed models for the purpose of calculating regulatory capital requirements, provided these have received supervisory approval. Following the financial crisis of 2007-2009, concerns were raised regarding the unwarranted variability of outputs of some models across banks, alongside criticism from external stakeholders of the complexity of the models. The ECB’s direct supervision of SIs under the SSM has provided a unique opportunity to improve the consistency of internal models across the euro area. The TRIM project was a large-scale multi-year supervisory initiative launched by the ECB at the beginning of 2016 in close cooperation with NCAs4 that are part of European banking supervision in order to confirm the adequacy and appropriateness of approved Pillar I internal models used by SIs in euro area countries, ensuring their compliance with regulatory requirements and harmonize supervisory practices relating to internal models within the SSM. Overall, the outcomes of the TRIM investigations confirmed that the internal models of SIs can continue to be used for the calculation of own funds requirements. However, for a certain number of models, some limitations were needed to ensure a level of own funds that was appropriate to cover the underlying risk.
EBA RTS on the Determination of Indirect Exposures to Underlying Clients of Derivative and Credit Derivative Contracts
Executive Summary
An undue concentration of exposures to a single counterparty has long been recognised as a central warning for banks’ stability. In this context, in 1991, the Basel Committee for Banking Supervision (BCBS) issued the first supervisory guidance on large exposures. However, the fact that no clear guidelines were available on how banks should measure their exposures to a single counterparty and on which factors they should consider when bearing in mind whether separate legal entities form a group of connected counterparties, come out very fragmented practices across banks. Additionally, the 2008 financial crisis showed that banks did not always measure exposures to single counterparties in a consistent way. In this context, in addition to direct exposures, indirect exposures can also arise through financial instruments such as derivatives. Indeed, a derivative contract can give rise to an indirect credit exposure when the issuer of the asset underlying the derivative is not the counterparty of the derivative contract.
Interest Rate Risk in the Banking Book
Executive Summary
The main purpose of this document is to provide an updated overview of the regulation that sets the measure of Interest Rate Risk in the Banking Book (IRRBB), with particular attention to the concept of proportionality and the possibility of applying advanced calculation models also for medium-sized banks (classes 2 and 3). The current regulation, linked to the integrated framework of Basel, places the IRRBB measure in the context of the Pillar II. Although in a context of proportionality, this framework allows the use of more advanced models and scenarios (i.e., parallel shifts of the curve) for class 2 and 3 banks. The guidelines issued by the EBA in 2018 (EBA/GL/2018/02) and the consequent amendments to the Bank of Italy Circular (285/2013) confirm this orientation and outline a new context. Starting from 2020 conditional cash flow models are explicitly required and expected, which considers behaviors linked to both rate scenarios and optional components on products.
Final Draft RTS - FX Risk or Commodity Risk in Non-Trading Book Positions under FRTB
Executive Summary
CRR2 implements in EU legislation the revised requirements to compute own funds requirements for market risk. In accordance with that Regulation, institutions are required to calculate own funds requirements for market risk for: (i) Positions held in the trading book; (ii) Positions held in the banking book (i.e., non-trading book) bearing foreign exchange (FX) or commodity risk.
Vulnerability Analysis on Italian Banks during the Covid-19 Pandemic
Executive Summary
The results of this vulnerability assessment show that the Italian banking sector is fairly positioned to take on the pandemic-induced stress impact, but capital depletion in this scenario could be material especially for Retail Lenders and Small Domestic banks that have the greatest CET1 impact and need a capital increase between 2021 and 2022 to comply with the prudential capital ratios set by the Supervisor.
EBA 2021 EU-wide Stress Test Methodological differences for Market and Credit Risks between 2021 and 2020 exercises
Executive Summary
EBA has just published the new guidelines for the 2021 EU-wide Stress Test exercise with significant changes on Credit Risk Area caused by Covid-19 pandemic. Major changes to the guidelines are due to the SARS COV 2 pandemic and the consequent economic recession for all European countries.
FRTB - The Alternative IMA
Executive Summary
Regulation (EU) No 2020/876 (the Capital Requirements Regulation 2 – CRR2) introduces the revised framework for minimum capital requirements for market risk. The alternative internal model approach (IMA) is one of the novelties introduced by the CRR2. The IMA is designed to capture market risks considering tail risks, risk of market illiquidity and the default risk through the sum of three components: 1)the Expected Shortfall risk measure; 2) the Stress Scenario Risk Measure for risk factors with limited observable data; 3) the own funds requirement for default risk associated with credit and equity positions.
Overview of CVA Framework Main Revisions
Executive Summary
The aim of this document is to analyze the review of the CVA risk framework set out in “Credit Valuation Adjustment risk - targeted revisions” [BIS – d507]. CVA risk is the exposure to changes in counterparty credit spreads and other market risk factors. It is typically incurred by banks that undertake derivative or securities financing transactions, which run the risk of mark-to-market losses if the creditworthiness of the counterparties deteriorates.
Structural FX Provision Final Guidelines (EBA/GL/2020/09) on the Treatment of Structural FX
Executive Summary
The JIT goes through Guidelines (EBA/GL/2020/09), on the treatment of structural FX under 352(2) of the CRR, which has been developed considering both the feedback of the industry on Discussion (EBA/DP/2017/01), Consultation Paper (EBA/CP/2019/11) and the new treatment of the structural FX in the 2019 version of the Fundamental Review of the Trading Book (FRTB - BCBS d457). Twenty-one respondents provided feedback on the consultation paper, EBA considered the feedback provided by all respondents in developing the final draft.
The Use of AI and ML by Market Intermediaries and Asset Managers
Executive Summary
As proven by the number of assessments and workstreams undertook so far, the Board of the International Organization of Securities Commissions (IOSCO) identified the use of Artificial Intelligence (AI) and Machine Learning (ML) by market intermediaries and asset managers as a key priority. Under this light, IOSCO published in June a Consultation Report to assist IOSCO members in providing appropriate regulatory frameworks in the supervision of market intermediaries and asset managers that adopt AI and ML.
Smart Working e Strumenti di Monitoraggio
Executive Summary
L'utilizzo dello smart working (lavoro agile o da remoto) per far fronte all'emergenza Coronavirus si è rivelato uno strumento di salvezza per tante attività economiche altrimenti bloccate dalla necessità di distanziamento sociale. Ha consentito infatti di salvaguardare l'unica forma di sicurezza imposta dall'emergenza epidemiologica pur consentendo a tante attività amministrative, di servizio alle aziende, di consulenza, professionali, editoriali di proseguire nella propria attività senza interruzioni o disservizi . Un aspetto da valutare è la gestione della prestazione del lavoro da remoto. Ciascun datore di lavoro infatti ha necessità di verificare il corretto svolgimento delle attività aziendali e la distanza sembrerebbe, in generale, una difficoltà ulteriore, posto che anche nel lavoro in azienda lo Statuto dei lavoratori pone importanti limitazioni a salvaguardia della dignità del dipendente e della sua privacy.
EU Implementation of FRTB: Regulatory Technical Standard on the Internal Model Approach
Executive Summary
The purpose of this document is to identify the key points of the final draft Regulatory Technical Standards (RTS) on the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB) released from EBA on 27 March 2020
Guide on Climate-Related and Environmental Risks
Executive Summary
The European Green Deal established the objective of making Europe the first climate-neutral continent by 2050. To accomplish this, industries are expected to reduce carbon footprints and transition into a more circular economy. In particular, the financial sector will play a key role in funding sustainable growth.
Rischio Tasso del Banking Book Overview ed Evoluzione Normativa
Executive Summary
Il documento in oggetto ha lo scopo principale di fornire una panoramica aggiornata sul contesto normativo che regola la misura del rischio tasso del banking book, con attenzione particolare al concetto di proporzionalità e alla possibilità di applicare modelli di calcolo più avanzati anche per banche di medie dimensioni (classi 2 e 3).
SA-CCR: Overview on Methodology and Challenges of the Revised Framework
Executive Summary
In this document the authors present the revised Standardised Approach for Counterparty Credit Risk (SA-CCR) in terms of methodological framework and potential implementation challenges.
EBA Guidelines on Loan Origination and Monitoring
Executive Summary
The new challenge proposed by the EBA is to move to a forward-looking/proactive approach of credit risk management throughout the loan's lifecycle: if loans are originated and monitored with robust and prudent standards, then these contribute to lower levels of NPLs inflows
Guidelines on CRM for Banks Applying the A-IRB
Executive Summary
Increased clarity of the credit risk mitigation framework is considered an integral part and last phase of the IRB review outlined by the EBA work program: the application of these guidelines will affect how A-IRB banks will determine their risk-weighted assets for exposures covered by funded credit protection (FCP) or unfunded credit protection (UFCP) and hence the amount of capital banks will need to hold
Guidelines on ICT and Security Risk Management
Executive Summary
The purpose of the EBA guidelines is to address ICT and security risks that have increased in recent years due to the interconnected IT systems between multiple financial institutions or between financial institutions and third-party service providers. Supervisory pressure is likely to increase in the area of ICT and security risk, not only because of pandemic crisis in progress.
Model Risk Management: Guidelines to an Effective Implementation
Executive Summary
Banks with the most robust MRM framework will respond better to the incoming crisis because they will be able to: (i) adjust data and methodologies quickly to reflect the "new normal"; (ii) monitor model at risk and model contagion effectively; (iii) inform business decision promptly and (iv) support profitability even in stressed economic and financial conditions.
Calendar Provisioning: An Overview
Executive Summary
Even if we are living in times of Covid-19 crisis, it is crucial for the banking sector to continue identifying, reporting and managing asset quality deterioration and the build-up of NPLs. In this analysis on Calendar Provisioning, after a regulatory and supervisory examination, have been highlighted some cross impacts and remediation on bank' processes and procedures.
Covid-19 Regulatory and Supervisory Response to Facilitate Lending
Executive Summary
Strict application of Regulatory and Supervisory rules may erode bank capital more quickly and, therefore their ability to lend at a time of COVID crisis: in order for banks to continue lending to households and companies it is necessary that some of these rules are used more flexibly. The aim of this note is to analyzed the main rules made flexible by the COVID crisis, in particular the recent EU Banking Package proposed by the European Commission. To exploit at best the supporting initiatives by Regulatory and Supervisory, banks need urgently to act swiftly on different topics.
Covid-19 Impatti Economici: Analisi a Confronto
Executive Summary
La pandemia da Covid-19 ha ormai generato la peggior crisi sanitaria a livello globale dalla Seconda Guerra Mondiale. Purtroppo alla crisi sanitaria si sta affiancando una crisi economica senza precedenti, con effetti devastanti sulla sopravvivenza delle imprese e cali drammatici del PIL che, secondo le stime di Goldman Sachs, possono arrivare fino al 24% nel secondo trimestre negli USA.
Covid-19 Some Thoughts on Public-Guarantee Loans and Banks in Italy
Executive Summary
In Italy, unprecedented measures - in the form of large-scale government guarantees on loans - were introduced in order to soften the impact of the Covid-19 fallout on firms. After a short review of the legislative framework, this note focuses on some possible short and medium-term impacts on the Italian banking system: it is of paramount importance to mitigate the growing Systemic risk
Covid-19 Measures to Mitigate Credit Risk EBA and BIS Initiatives
Executive Summary
The Covid-19 pandemic and the resulting profound economic crisis we are experiencing has prompted several regulators to implement support measures for the banking sector to ensure the continuation of financing activities for the real economy. In this note we will focus on some initiatives aimed at mitigating credit risk (default and RWA treatment, Accounting treatment) and some final remarks on risks and possible mitigations for the banking sector.
Covid-19 Analisi di Impatto sul Rischio Paese Italia
Executive Summary
iason ha condotto un'analisi di impatto sul rischio Paese Italia a seguito dell'emergenza da COVID-19 e delle conseguenti misure di contenimento. Lo studio parte da 3 diverse assunzioni sulle dinamiche inerenti PIL, deficit e debito pubblico e ne simula gli impatti sull'evoluzione delle Probabilità di Fallimento legate al settore Governativo Italia.
Covid-19 Impact Analysis on Italy's Sovereign Risk
Executive Summary
The epidemiological emergency linked to the spread of the virus COVID-19 has triggered as of March 2020 a series of lockdown measures by the Government Authorities with consequent impact on the economic system of the country. The study aims to provide an impact analysis on the Sovereign Risk of Italy in terms of the evolution over time of the probability of default (PD) given significant shocks to some important macroeconomic variables such as GDP, deficit and public debt.
Smart Working e Sistemi a Supporto
Executive Summary
Lo studio si propone di fare una mappatura generale dei servizi forniti da alcune importanti piattaforme software e funzionali allo smart working, diventato di cruciale importanza specialmente in situazioni di emergenza come quella attuale, dove le misure contenitive messe in atto dalle Autorità Governative per ridurre e prevenire il contagio da COVID-19 rendono necessario lavorare da remoto.
Covid-19 Analisi di Impatto sulle Probabilità di Fallimento delle Società Non Finanziarie in Italia
Executive Summary
iason ha condotto uno studio che stima l'impatto sulle PD (probabilità di fallimento espresse su base annua) del settore Società non Finanziarie in Italia, a seguito del blocco che stiamo vivendo per l'emergenza sanitaria. I risultati sono presentati sotto l'ipotesi di 3 scenari contenenti shock di entità crescenti a variabili macroeconomiche e finanziarie di sistema (variazioni annue di PIL, Reddito Disponibile e indice FTSEMIB). Le analisi sono basate sul modello proprietario Iason G-RISK PAR, fruibile da chiunque attraverso un servizio SaaS web-based. Tale modello è in linea con le metodologie utilizzate dalla BCE e adatto quindi alla simulazione di impatto per portafogli di credito ben diversificati su vari settori economici.
Structural FX (S-FX) Provision EBA CP on the treatment of structural FX under 352(2) CRR
Executive Summary
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Any positions which an institution has deliberately taken in order to hedge against the adverse effect of the exchange rate on its ratios in accordance with Article 92(1) may, subject to permission by the competent authorities, be excluded from the calculation of net open currency positions..
Climate Change Risk Overview on the Regulatory and Supervisory Evolution
Executive Summary
Many stakeholders in the financial industry, and central bankers, too, have realized that climate change is not an issue for next century. It's an issue for now, and it's a topic not only for other sectors but also for the financial sector and for central bankers and supervisors.” Sabine Lautenschläger at Network for Greening the Financial System Conference, Paris, 17 April 2019
EBA Draft Guidlines on Loan Originitation and Monitoring
Executive Summary
In June 2019 the European Banking Authority (EBA) published the Consultation Paper on draft guidelines on loan origination and monitoring (EBA/CP/2019/04) as a response to the European Council Action Plan on tackling the issues such as transparency and borrower affordability assessment.
EBA 2020 EU-wide Stress Test Market Risk
Executive Summary
The aim of the EBA EU-wide Stress Test is to assess the resilience of EU Banks to adverse market developments. The impact of market risk on all positions at partial or full fair value measurement is to be assessed through full revaluation, which is performed after the application of the shocks, that are provided from the EBA in the market risk adverse scenario, to a common set of market risk factors. Under the trading exemption, Banks are allowed to not apply a full revaluation on items held with a trading intent and their related hedges. Banks under this exemption have the possibility to adopt a simplified set of rules that are based on a sensitivity approach. After the full revaluation, Banks have to recalculate the CVA and liquidity reserve. Instead, for CCR, it is assumed that the two most vulnerable of the largest ten counterparties default
Research Paper Series
Impact of Covid-19 Announcements on Financial Markets
Executive Summary
The purpose of this content is to provide a detailed analysis of the financial markets trend after the outbreak of the novel Coronavirus, trying to explain how the covid-related announcements have affected the markets. In particular, the paper focuses on highlighting the differences between the first and second wave of Covid-19. After a brief illustration of the pandemic effect on financial markets during 2020, two main categories have been identified among the announcements that most influenced the markets: medical bulletins, which report the daily number of confirmed cases and deaths, and government actions to counter the health and economic impact of the pandemic, including closure policies and social distancing, prevention campaigns and the use of medical devices and economic aids. These measures, together with the redundancy of news talking about the severity of the pandemic, also affected investors sentiment, which in turn weighed on equity market returns. Through a pooled OLS regression analysis with panel data, we find that during the first wave the stock market reacts negatively to the rise in confirmed cases, to lockdown and social distancing policies. Throughout the second wave, the markets are generally independent of medical bulletins and reacts negatively to the increase in government healthcare actions. The introduction of vaccine may have played a crucial role in these months, bringing new hopes and changing the markets trend. For this reason, future studies may focus on the relation between vaccines administrations and stock markets.
A Quantization Overview to Credit Counterparty Risk
Executive Summary
The counterparty risk topic has become predominant over the past few years according to the worldwide financial crisis happened in 2007-2008 and the following European sovereign debt crisis. It began to receive a growing attention from regulators, which required financial institutions to comply with more punctual conditions concerning counterparty credit exposures arising from derivatives, securities financing transactions, default and downgrade risks characterizing the Over The Counter derivatives market. Consequently, banks started to develop a series of effective and more accurate measures of risk, aimed at estimating the future MTM (or MTFs) value of a derivative at a potential default date, which is typically highly uncertain (as seen from today), over prescribed time horizon and fixed grid of time buckets. The most common approach to quantify the future MTM value is Monte Carlo simulation, which exhibits remarkable difficulties in terms of high computational cost, particularly when the problem dimension increase. Indeed, it’s particularly dependent on the number of considered assets. This is why many financial players moved to more effective and time saving technologies, e.g., based on grid computing and Graphics Processing Units (GPU) capabilities. Within this paper we would like to approach an alternative method based on different algorithmic strategies, quantization. The present paper gives an initial overview of both Monte Carlo Method and quantization approach with a subsequent comparison of the numerical application results among different practical cases. The goal is to show how the quantization approach outperforms Monte Carlo, both in terms of accuracy and computational efforts.
New Standard Conventions for Cash Product and Impacts on Banking Processes and Procedures
Executive Summary
IBOR reform may risk to create divergences in the cash products market as there are not standards defined at internation level. The market participants are facing a transformation which will bare the results only in the next years. Also, the deadline of the LIBOR dismission, changes depending on the currency area and this does not help to reach standards and to provide a clean and stable picture of the markets to participants. The sterling working group, the ARCC and the Euro working group are working to define same conventions to mitigate the unpredictable changes of the transition and this articles aims to clear the different choices and the actions made so far.
Fallback Rate: Cash and Derivatives Products
Executive Summary
Fallback clause is one of the most important pieces to complete the LIBOR reform. It allows legacy contracts to have legal continuity and avoid litigation among contractual parties. The main organizations for Cash products and derivatives propose different approaches about the application of the clause in the legacy contracts. ISDA, for derivatives contracts, launched in October 2020 a protocol to amend contracts by using the fallback clause previously defined in the various working groups. The supplement will amend ISDA’s standard definitions to incorporate robust fallbacks for legacy derivatives linked to IBORs from January 25th, 2021. For cash products, FCA and LMA, with the support of the main regulators, have been working together with the market participants in order to define common rules and waterfall choices to amend the contracts. The following papers tries to illustrate (i) the different approaches in the two areas, (ii) the trigger events for the fallback clause and (iii) how the migration could happen once the LIBORs will be dismissed.
Introduction on Money Laundering and Financial Terrorism Risks
Executive Summary
The author would provide an overview of Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) policies and procedures in place. In the first section, the author presents a general overview of International Standards with a focus on interpretative notes on the risk-based approach and FIU. To follow, the author gives a summary of the European legislation and the last contributions of i Basel Committee and European Banking Authority.
Vulnerability Analysis on Italian Banks during the Covid-19 Pandemic
Executive Summary
The results of this vulnerability assessment show that the Italian banking sector is fairly positioned to take on the pandemic-induced stress impact, but capital depletion in this scenario could be material especially for Retail Lenders and Small Domestic banks that have the greatest CET1 impact and need a capital increase between 2021 and 2022 to comply with the prudential capital ratios set by the Supervisor. The most significant effects on banks’ capital requirements are given by the credit component, since the effect of the credit support measures (moratoria and loan guarantees) reveal partially the real risk of credit exposures thus increasing the risk of “cliff effect”.
2019 FRTB Review - Main Interventions (Rev.)
Executive Summary
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This paper provides a summary on the main innovations about the Fundamental Review of the Trading Book, the new regulatory capital requirements for Market Risk. In particular, the author focuses on the modifications of the standards introduced by the Basel Committee on Banking Supervision in January 2019, highlighting the amendments with respect to the 2016 version and providing a qualitative assessment on each kind of intervention.
Synergies and Challenges in the Implementation of Basel IV Regulations Process (Rev.)
Executive Summary
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Due to the need for all European banks to comply with the upcoming regulatory frameworks issued by BCBS and ISDA authorities, the authors decided to analyze three of the most impacting regulations for the bank Risk IT function. The recent regulatory need to have a more risk-sensitive framework translated into the design of quite refined methodologies also for standardized approaches: considering the sensitivity-based common approach, the authors chose to focus on the FRTB-SBM, SIMM and SA-CVA regulations and to give a representation of the workflow needed for the metric calculation. The article has the intention to find all relevant similarities and synergies, both on a methodological and technical point of view, that can be exploited by banks, as well as to warn against some challenges that can arise from their implementation.
The Effects of FRTB in the CVA Risk Framework (Rev.2)
Executive Summary
In the light of the recent publication of the finalised Basel 3 review by the Basel Committee on Banking Supervision (BCBS), the authors analyse the effects of the incoming FRTB regulation on the CVA risk framework. As explained in the article, the Basel Committee in 2015 started an important review of the CVA risk framework which has been finalized in December 2017 with the publication of the new Basel 3 standards. In July 2020, BCBS published the revised version of CVA risk framework after November 2019 consultation. The regulator is proposing a new sensitivity-based CVA risk charge with the intention of being much more consistent with the FRTB standardised approach. The paper is also a chance for the authors to explore the shortcomings and the challenges implied in the newly proposed CVA regulation, especially with respect to the concurrent financial risk frameworks.
The LIBOR Reform and the Revolution of the New Benchmark Rates: Overnight Rates and New Conventions on Contracts and Instruments
Executive Summary
The advent of the new reference rates, strongly desired following the credibility crisis of LIBORs, has led for almost all currencies, to the definition of specific Overnight rates as new reference (risk-free) rates. This determines a strong innovation in all banking and financial products indexed at these rates. In the article technical aspects and open problems.
The Propagation of Liquidity Shocks in the Interbank Market:an Analysis on Systemic Risk
Executive Summary
The main concern of this work is on the understanding of the drivers of financial contagion within the banking sector. The interbank market represents the major channel through which liquidity shocks propagate within the financial system. The analysis provides a description of the repo market's dynamics, that represents the main source of short term funding for financial intermediaries. The evolution of the structure of this market is characterized by a sharp increase in complexity and concentration. This tendency has increased the exposure of the financial system to systemic outbreaks. Moreover, we consider a theoretical framework based on graph theory, that is able to reproduce a financial network and its dynamics in response to a set of liquidity shocks. The work takes into consideration two distinct graph models, Erdös and Rényi model and the Scale Free model. The former is characterized by a binomial degree distribution while the latter produces network structures characterized by power law degree distributions, that are suitable to reproduce the high levels of concentration that are actually observed in real financial configurations. The resilience of the banking sector is then evaluated through the use of an enhancement of the model for the dynamics of financial contagion, developed by Gai, Haldane and Kapadia [15] that is applied to the two network structures previously introduced. The analysis also stresses the importance of both micro and macro-prudential regulation in order to prevent systemic outbreaks. From a macro perspective, the introduction of a periodical stress testing framework for liquidity risk would increase the central supervision over the risk of observing crunches in the interbank market that might impair several interlinked financial markets and ultimately the real economy.
Climate Change Risk: Overview of the Current Landscape and Next Steps for Financial Institutions
Executive Summary
Despite the overshadowing effect of the Covid-19 pandemic during the second quarter of the year, discussions centered on the impacts and opportunities arising from the inclusion of climate change risk into financial institutions' governance, strategy, risk management and disclosure frameworks are constantly getting more intense: this paper aims to provide help to banks (and risk managers, in particular) in comprehending the nature and implications of such new types of risk and to comply with future directives. The paper will provide an overview of the most recent developments in Regulatory and Supervisory expectations for the European area, as well as suggestions related to risk metrics computation's methodologies and a simple practical example of scenario analysis performed with the use of Iason's G-RiskPar tool.
Remote Working:Advices to Reduce Risks and Boost Productivity
Executive Summary
This article has the main purpose to put forward some ideas to embrace a new way of working, that implies a change of mentality but can also be very effective at the productive level; we provide some practical advices on how to manage potential operative risks and maximize benefits working from home. In the last part, we shows how technology can play a pivotal role in supporting and maximizing performances of remote working.
The LIBOR Reform and the New Reference Rates Revolution: Origin and Guidelines
Executive Summary
Starting from the well-known problem of LIBOR rates manipulation, on the thrust of the Financial Stability Board, an extensive reform, for the development of new benchmark rates (RFRs), was conducted at the international level. In this work, the first of a series, after a brief introduction, we try to focus the attention on the operational changes expected within the interest rate market, in light of the indications provided by the Regulators.
New Challenge on SA-CCR: an Overview on Implementation Process
Executive Summary
All European banks need to comply with the improvements in the calculation of capital requirements introduced with Basel III. In 2014, the Basel Committee introduced a Standard Approach for Counterparty Credit Risk (SA-CCR) that is the object of some review by the European Banking Authority and Financial Industry in the last years. The authors have been focused on the last changes of the SA-CCR framework, highlighting the amendments introduced and the industry response to the proposed framework. Furthermore, the authors provide an overview of SA-CCR implementation in a European Bank, highlighting possible critical points in the implementation phase.
2020 EU-wide EBA Stress Test:A Methodological Analysis on the Credit Risk Perspective
Executive Summary
This paper addresses the main novelties brought by the 2020 EU-wide stress test methodological note. These variations are mainly a consequence of results of the last stress test exercise as well as the regulatory changes (new DoD, new securitization framework and CRR II as well as the prudential back-stop rule), which have already or will come into effect during the timespan of the exercise. In comparison to the previous methodology (i.e. 2018 EU-wide stress test methodological note), the paper analyses the main topics on which clear differences emerge: scenario reversion, macro-economic projections, provision calculation for NPEs, securitisation exposures, PIT parameters, provision for sovereigns, LTV and impact on REA and IRB regulatory EL. In addition to that, the paper provides a constructive overview of the critical points for the future consideration of the stress test methodology
NPL Classification A Random Forest Approach (Rev.)
Executive Summary
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Artificial Intelligence has quickly entered in the financial services industry, covering a wide range of applications. This work proposes a structured statistical approach to classify NPL assets according to their potential recovery level, within an unsecured commercial portfolio. Asset classification is based on the information provided with the NPL portfolios and, possibly, some information gathered during the recovery process. The framework adopted is based on two different components: one targeting the cases that will be recovered and one estimating their recovery level, in particular the work compares a Machine Learning technique known as Random Forest to a better-known Logit approach. The first is introduced with a review of the underlining Decision Tree theory, including its performance metrics, to which an extended Confusion table is added to facilitate the comparison of the event recovery forecasts provided by the different models. The comparison shows that the Random Forest approach is as reliable and performing as the more known Logistic approach, providing a solid overall performance even with a limited set of information. It also successfully tests the ability to compare a portfolio under management to a new one of the same type.
FinTechs and Challenger Banks: Old Business, Brand New Approach
Executive Summary
FinTechs are increasingly challenging the status quo of the financial system, either providing brand new services or revisiting the actual players' offerings. The rise of these companies is fueled by big financing from PE, VC and crowdfunding, and by an extremely favourable ground from both a regulatory and a clientele point of view. Given this general scenario, the paper focuses on the major new fintech players in the European banking landscape, analysing their business model and the possible implications for the traditional commercial banks.
Security Market: an Overview of Repo and Security Lending Transactions
Executive Summary
With this work, we would like to provide an overview of the Repurchase Agreement (Repo) and the Security Lending markets. Often, it could be difficult to distinguish Repo and Security Lending: analyzing both typologies of instruments we first look for any differences for what concerns their technical structures, economic profile, participants, legal arrangements. Second, we analyze how these kind of instruments behaved and which vulnerabilities appeared during the last financial and banking crisis. We end the article focusing on structured typologies of Repo, tri-party trade and the total return swap highlighting characteristics in common with classic Repo.
NPL Classification A Random Forest Approach
Executive Summary
Artificial Intelligence has quickly entered in the financial services industry, covering a wide range of applications. This work proposes a structured statistical approach to classify NPL assets according to their potential recovery level, within an unsecured commercial portfolio. Asset classification is based on the information provided with the NPL portfolios and, possibly, some information gathered during the recovery process. The framework adopted is based on two different components: one targeting the cases that will be recovered and one estimating their recovery level, in particular the work compares a Machine Learning technique known as Random Forest to a better-known Logit approach. The first is introduced with a review of the underlining Decision Tree theory, including its performance metrics, to which an extended Confusion table is added to facilitate the comparison of the event recovery forecasts provided by the different models. The comparison shows that the Random Forest approach is as reliable and performing as the more known Logistic approach, providing a solid overall performance even with a limited set of information. It also successfully tests the ability to compare a portfolio under management to a new one of the same type.
BigTech and New Banking Landscape - Evolution, Benefits, Risks and Oversights
Executive Summary
Nowadays advance in technology, coupled with huge amount of heterogeneous data being available, is boosting developments in fields as marketing, robotics, automotive, etc. In this sense, the financial sector is not any different, having already experimented substantial changes from, just to name a few, trading activities to credit lending's. Entrance of new players, from small FinTech companies to BigTech firms, has the potential of either enhance or disrupt the status quo of the financial ecosystem. Examples are already tangible in countries like China, were Alipay, Tencent and Ant Financial are having a sensible impact on payments and credit provisioning activities. Since even more firms are attracted by the potential revenue streams coming from opportunities within the financial sector, regulators has started posing questions about how non-financial institutions should be regulated. This paper aims at providing an overview of the current FinTech and BigTech landscape, with emphasis on the main services provided, coupled with a summary of the assessments already performed by surveillance authorities (mainly BIS) on risks and opportunities the financial sector is facing.
Risk and Profitability of Sight Deposits in the Italian Banking Industry (Rev)
Executive Summary
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This article presents a stochastic risk factor approach to gauge the expected profitability and the liquidity and duration risks of sight deposits of the Italian banking industry, using public data available from Banca d'Italia, spanning over a long period of time that includes the Euro Crisis. The approach is applied to both retail and corporate customers, and it considers their different behaviour based on the size of their deposit.
Modeling of Libor-Ois Basis (Rev)
Executive Summary
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The authors introduce a set of models that explain the market phenomenology of Libor forward fixings implied in swap prices. The models are all based on the idea that the Libor fixings refer to a panel of primary banks whose composition may change over time. This effect is crucial to obtain the observed humped forward fixing curves, that could not be otherwise retrieved by a simple credit default model or by a forward interest rate analogy. The models differ only in the assumptions on how the panel composition will change in the future.
Market Instruments for Collateral Management (Rev)
Executive Summary
We analyse the most common market instruments to manage and optimise collateral allocation: the repo, the sell/buy back and security lending.
Collateral Management: Processes, Tools and Metrics (Rev)
Executive Summary
Collateral management is a crucial activity in the financial industry. The author introduces a framework to analyse the supply and the demand of collateral internally originated by the banking activity, the tools to manage both and the targets that should be aimed at.
Towards a Theory of Internal Valuation and Transfer Pricing of Products in a Bank: Funding, Credit Risk and Economic Capital (Rev)
Executive Summary
In this article the author outlines a framework to theoretically identify the components of the value that a bank should attach to a deal. Moreover the framework suggests how to charge these components to the relevant departments and/or to the final counterparty (client) by an internal transfer pricing system.
Maximizing Cumulative Prospect Utility for Target Annuity Investment Strategies
Executive Summary
The aim of this paper is to show how to use the cumulative prospect theory, created by Kahneman and Tversky, that takes into account the customer's parameters of risk-aversion and reaction to extreme events, loss and gains, in order to plan an investment strategy (mainly based on portfolio insurance techniques) to receive a target annuity after a previously established period of time.
Are EBA Stress-Test Exercises Driving Banks into Different Business Models?
Executive Summary
The paper provides a general analysis of banking business models identification and evolution, and the relationship between the historical behaviour of business models and EBA stress-test projections, with particular attention to Italian banks. The authors propose a new approach to identify business models and then investigate if EU wide stress-test exercises reflect or contrast the past. In addition, they suggest that several banks involved in the stress-test exercises changed business model in order to respond to the continuously increasing regulatory framework even at the expense of economic performances. Finally, the focus on Italian banks, highlights the role of national characteristics that should be considered when analyzing and comparing banks.
A Benchmark Framework for IFRS9 Multiyear-PD Curves Estimation and Stress Testing Exercise - an Application
Executive Summary
This paper presents an econometric and statistic methodologies to manage the enhancement of credit risk modelling introduced with the IFRS9 regulation and it sketches a framework to asses the new IFRS9 measures on a credit portfolio considering different macro-economic scenarios. More specifically, we calibrate the models with the purpose of creation of the multi-year IFRS9 PD curves that can be used to evaluate the Expected Credit Loss 1y and Lifetime for Italian credit portfolios. The framework developed take advantage of the well known theory behind the satellite models to define the sensitivity of credit risk to the macroeconomic environment where the creditors operate. The data, that are a benchmark of Italian system, are retrieved from the public database of "Banca d'Italia" where they are collected according to geographical area and economic activities. To model the macroeconomic environment we calibrate a structural vector autoregression model, in order to describe the behavior of the most relevant economic indicators. The statistical technique examined to estimate the satellite models and VAR parameters is the Bayesian Averaging of Classical Estimation which is widely used also by the ECB in building benchmark models. This framework allows for i) evaluating different macro-economic scenarios; ii) identifying an Italian benchmark of credit risk measure under the new IFRS9 approach; iii) defining a solid framework in order to calculate the Expected Credit Loss for accounting purposes, which can be used on any Italian credit portfolios; iv) estimating the credit risk portfolio sensitivity to the macro-economic shocks, according to its composition in term of economic activities and geographic area of the creditors that belonging to it.
2019 FRTB Review - Main Interventions
Executive Summary
This paper provides a summary on the main innovations about the Fundamental Review of the Trading Book, the new regulatory capital requirements for Market Risk. In particular, the author focuses on the modifications of the standards introduced by the Basel Committee on Banking Supervision in January 2019, highlighting the amendments with respect to the 2016 version and providing a qualitative assessment on each kind of intervention.
Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)
Executive Summary
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We extend the analysis we sketched in Castagna and we provide an application of the framework we introduced to incrementally evaluate financial contracts within a financial institution's balance sheet
An overview of BREXIT effects on the Banking System
Executive Summary
The decision by Great Britain to leave Europe is certainly an extraordinary event. Following what has been proposed by some Regulatory Opinions and some already developed works, this article presents a brief overview of the systemic effects for the Banks active in the Community market and in the UK. The effects of the so-called BREXIT can be observed in all the operating levels of the Banks and will determine the need, by the Institutes, to develop a series of procedures to mitigate the risks inherent in this event.
Interest Rate Benchmarks Reform - Time to Transition is Now
Executive Summary
The paper provides a general overview on the ongoing process of reforming Interest Rate Benchmarks, with particular attention to the Euro Area. The authors highlight the potential implications that this reform would have on both business and technical aspects of banks' processes, with focus on the Risk Management fields. Due to the magnitudo of the change and the challenges posed by its implications, the authors believe banks should start transition processes now in order to minimize disruption when current IR benchmarks will cease to be contributed (for some of them as early as 2020). In addition, they suggest banks could take this transition also as a chance to optimize current processes within their risk frameworks in order to reduce complexity and increase efficiency.
SA-CCR Implications and Challenges of the New Regulation
Executive Summary
In light of the revised regulatory frameworks for market and counterparty risks, the author gives an overview on the Standardised Approach for Counterparty Credit Risk (SA-CCR) and its implementation issues in a bank Risk framework. The approach presented by the Basel Committee on Banking Supervision on March 2014 required a study performed by the European Banking Authority concerning the mapping of derivative transactions to risk categories and the correction of regulatory formulas in the current context of negative interest rates. Although the new regulation solves some shortcomings of the current standard approach to CCR, e.g. partially recognizing netting benefits coming from margining and hedging, a few features still need particular attention in order to properly measure the risks associated to the instruments in scope of the regulation. In particular, as also pointed out by EBA, a significant impact on the final capital requirement (the EAD) can derive from the methodology employed to identifiy the primary risk driver of each transaction. After revising the methodologies proposed by EBA, a case study is presented, based on a portfolio including cross currency swaps, and an alternative methodology, aimed at assessing the materiality of each risk driver of the transaction, is proposed. The details on the latter are left to a future publication.
Synergies and challenges in the implementation of Basel IV regulations
Executive Summary
Due to the need for all European banks to comply with the upcoming regulatory frameworks issued by BCBS and ISDA authorities, the authors decided to analyze three of the most impacting regulations for the bank Risk IT function. The recent regulatory need to have a more risk-sensitive framework translated into the design of quite refined methodologies also for standardized approaches: considering the sensitivity-based common approach, the authors chose to focus on the FRTB-SBM, SIMM and SA-CVA regulations and to give a representation of the workflow needed for the metric calculation. The article has the intention to find all relevant similarities and synergies, both on a methodological and technical point of view, that can be exploited by banks, as well as to warn against some challenges that can arise from their implementation.
Modelling Banking Commissions
Executive Summary
This paper presents a procedure for the modelling of net bank commissions (Non Interest Rate Income) as a function of macroeconomic variables. The methodology used to estimate the models is based on a Bayesian approach (BACE) method which provides the degree of relevance for each macroeconomic variable, determining its impact in explaining the evolution of the commissions. Uses of the procedure described above range from internal management purposes to regulatory and supervisory stress testing. A quantitative analysis of the commissions is presented for the Italian banking system, at an aggregate level, and for a sample of Italian banks, at single entity level.
Analysis of the New Standards to Measure and Manage the Risk of the Banking Book Issued by BIS Committee
Executive Summary
This paper presents an analysis of the new standards issued in April 2016 by the Basel Committee, on the measurement and the management of the IRRBB. We will investigate how the new rules will affect the processes currently run by banks and if they are consistent with sound financial principles.
The Effect of the FRTB in the CVA Risk Framework (Rev)
Executive Summary
In the light of the recent publication of the finalised Basel 3 review by the Basel Committee on Banking Supervision (BCBS), the authors analyse the effects of the incoming FRTB regulation on the CVA risk framework. As explained in the article, the revision of regulatory CVA standards, started in 2015 with consultative papers, has been finalised in December 2017 by the Basel Committee with the publication of the new Basel 3 framework. The regulator is proposing a new sensitivity-based CVA risk charge with the intention of being much more consistent with the FRTB standardised approach. The paper is also a chance for the authors to explore the shortcomings and the challenges implied in the newly proposed CVA regulation, especially with respect to the concurrent financial risk frameworks.
Benchmark Framework for NMDM
Executive Summary
This paper presents an application of stochastic risk factor approach to model the non-maturing deposits and it sketches a benchmark framework to assess the related expected profitability and the liquidity and duration risks of a bank compared with the rest of the economic system it works within. More specifically, we calibrate the model to system data for sight deposits of the Italian banking industry, available from the public statistical data base of Banca d'Italia, spanning over a long period of time that includes the Euro Crisis. The approach is applied to both retail and corporate customers, and it considers their different behaviour based on the size of their deposit. It allows for i) an integrated modelling of the market interest rates, creditworthiness of the bank and evolution of the deposits' volume; ii) stochastic risk factors driving deposits' rates and volume; iii) unified and consistent measurement of the interest rate risk and the liquidity; iv) negative interest rates, both at inception and in the future; v) the evaluation of optionalities such as the zero floor on the deposits rates; vi) stress testing for ALM purposes.
The Effect of the FRTB in the CVA Risk Framework
Executive Summary
In the light of the recent reviews performed by the BCBS, the authors analyse the effects of the incoming FRTB regulation on the CVA risk framework. As explained in the article, the consultative papers published by the Basel Committee between July 2015 and March 2016 are proposing a new sensitivity-based CVA risk charge that would be much more consistent with the FRTB standardised approach than the current Basel 3 framework. The article is also a chance for the authors to explore the shortcomings and the challenges implied in the newly proposed CVA regulation, especially with respect to the concurrent financial risk frameworks.
Argo Magazine
Argo Magazine N.20 2021
Issue N. 20-2021
Market Risk
A Quantization Overview to Credit Counterparty Risk
AML/CFT Risk
Introduction on Money Laundering and Financial Terrorism Risks
Pandemic Effects on Financial System
Impact of Covid-19 Announcements on Financial Markets
Vulnerability Analysis on Italian Bank during the Covid-19 Pandemic
Argo Magazine N.19 2020
Issue N. 19-2020
Systemic Risk
The Propagation of Liquidity Shocks in the Interbank Market: an Analysis on Systemic Risk
New Market Standards
The LIBOR Reform and the Revolution of the New Benchmark Rates: Overnight Rates and New Conventions on Contracts and Instruments
Climate Change Risk
Climate Change Risk: Overview of the Current Landscape and Next Steps for Financial Institutions
Argo Magazine N.18 2020
Issue N. 18-2020
New Ways of Working
Remote Working: Advices to Reduce Risks and Boost Productivity
New Market Standards
The LIBOR Reform and the New Reference Rates Revolution: Origin and Guidelines
Trading Book
New Challenge on SA-CCR: an Overview on Implementation Process
Argo Magazine N.17 2019
Issue N. 17-2019
Credit Risk
2020 EU-wide EBA Stress Test: A Methodological Analysis on the Credit Risk Perspective
NPL Classification a Random Forest Approach
FinTech
FinTechs and Challenger Banks: Old Business, Brand New Approach
Market Risk
Security Market: an Overview of Repo and Security Lending Transactions
Argo Magazine N.16 2019
Issue N. 16-2019
FinTech
BigTech and New Banking Landscape - Evolution, Benefits, Risks and Oversights
Stress Test
Are EBA Stress-Test Driving Banks into Different Business Models?
Market Risk
2019 FRTB Review: Main Interventions
Argo Magazine N.15 2019
Issue N. 15-2019
Credit Risk
A Benchmark Framework for IFRS9 Multiyear-PD Curves Estimation and Stress Testing Exercise: an Application
Portfolio Management
Maximizing Cumulative Prospect Utility for Target Annuity Investment Strategies
Incremental Valutation Frameworks
Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)
Argo Magazine N.14 Fall 2018
Issue N. 14-2018
New Market Standards
Interest Rate Benchmarks Reform: Time to Transition is Now
An overview of BREXIT effects on the Banking System
Banking Book
Analysis of the New Standards to Measure and Manage the Interest Rate Risk of the Banking Book Issued By BIS Committee
Argo Magazine N.13 Summer 2018
Issue N. 13-2018
Trading Book
Synergies and challenges in the implementation of Basel IV regulations
SA-CCR: Implications and Challenges of the New Regulation
Stress Test
Modelling Banking Commissions: An Application to the Italian Banking System
Argo Magazine N.12 Winter 2018
Issue N. 12-2018
Alm & Irrbb
A Benchmark Framework for Non Maturing Deposits: An Application to Public Data Available from Banca d'Italia
Trading Book
The Effects of FRTB in the CVA Risk Framework
Argo Magazine N.11 Winter 2016
Issue N. 11-2016
Banking & Finance
Risk and Profitability of Sight Deposits in the Italian Banking Industry
The Fundamental Review of the Trading Book Standardised Approach for Market Risk: Revision and Challenges
Argo Magazine N.10 Spring 2016
Issue N. 10-2016
Banking & Finance
Pricing and Hedging Multi-Asset Options with High-Dimensional Quasi Monte Carlo: FD vs AAD Greeks
Energy & Commodity Finance
The Energy Storage Systems
What Are the Consequences Arising from MIFID II for Energy Operators?
Argo Magazine N.09 Winter 2016
Issue N. 09-2016
Energy & Commodity Finance
To Combine or not to Combine? Recent Trends in Electricity Price Forecasting
Banking & Finance
Complexity and the Mistakable Law of One Price
Argo Magazine N.08 Fall 2015
Issue N. 08-2015
Banking & Finance
The Revision of the CVA Capital Charge by the Basel Commitee
Energy & Commodity Finance
When has OPEC Spare Capacity Mattered for Oil Prices
Argo Magazine N.07 Summer 2015
Issue N. 07-2015
Energy & Commodity Finance
Off-shore Wind Investment under Uncertainty: Part II
OW Bunker : from IPO to Bankruptcy
Banking & Finance
Modelling of Libor-Ois Basis
Argo Magazine N.06 Spring 2015
Issue N. 06-2015
Banking & Finance
Pricing and Risk Management with High-Dimensional Quasi Monte Carlo and Global Sensitivity Analysis
Efficient Computation of the Counterparty Credit Risk Exposure
Energy & Commodity Finance
Off-shore Wind Investment under Uncertainty: Optimal Timing, Size and Leverage
Structural Positions in Oil Futures Contracts
Argo Magazine N.05 Winter 2015
Issue N. 05-2015
Energy & Commodity Finance
Order-Flow and Liquidity Provision
Monetary Measurement of Risk: A Critical Overview - Part IV: Coherent Portfolio Risk Measures
Banking & Finance
Market Instruments for Collateral Management
A Critical Review of Central Banks Satellite Models for Probbilities of Default
Argo Magazine N.04 Fall 2014
Issue N. 04-2014
banking & finance
Collateral Management
Bond Settlement Migration
energy & commodity finance
Natural Gas Statistical Arbitrage
Monetary Measurement of Risk: A Critical Overview - Part III: Convex Measures of Risk
Argo Magazine N.03 Summer 2014
Issue N. 03-2014
energy & commodity Finance
Security of Supply and the Cost of Storing Gas
Monetary Measurement of Risk: A Critical Overview - Part II: Coherent Measure of Risk
banking & finance
Towards a Theory of Internal Valuation and Transfer Pricing of Products in a Bank
special interview
Alessandro Mauro
Argo Magazine N.02 Spring 2014
Issue N. 02-2014
banking & finance
Fast Monte Carlo princing of Nth-to-default swaps
Analytical Credit VaR Stress Tests
energy & commodity finance
Stochastic Optimization for the Princing of Structured Contracts in Energy Markets
Pricing Spark Spread Option with Co-Dependent Threshold Dynamics
special interview
Marco Bianchetti
Argo Magazine N.01 Winter 2014
Issue N. 01-2014
banking & finance
Sight Deposit and Non-Maturing Liability Modelling
Dividen Risk and Dividen-based Instruments
Analytical Credit VaR under Different Scenarios for Probabilities of Default and Recoveries
Optimal Quantization Methods
special interview
A talk with Fabio Mercurio
energy & commodity finance
Asian Options with Jumps
A General Approach to Modelling and Pricing in Energy and Weather Markets
Trading Oil spreads: Statistical Arbitrage
crash course
Monetary Measurament of Risk: A Critical Overview
Argo Collection
Argo Collection N.02 2021 - The Benchmark Reform
Issue N. 02-2021
The LIBOR Reform and the New Reference Rates Revolution: Origin and Guidelines
The LIBOR Reform and the Revolution of the New Benchmark Rates: Overnight Rates and New Conventions on Contracts and Instruments
New Standard Conventions for Cash Products and Impacts on Banking Processes and Procedures
Fallback Rate: Cash and Derivatives Products
Argo Collection N.01 2020 - Basel IV Revision and Challenges on Market Risk
Issue N. 01-2020
Basel IV Overview
Synergies and Challenges in the Implementation of Basel IV Regulations
2019 FRTB Review: Main Interventions
New Challenges on SA-CCR: an Overview on Implementation Process
The Effects of FRTB in the CVA Risk Framework
Archive
Incremental Valuation of Derivative Contracts
Funding Valuation Adjustment (FVA) and Theory of the Firm: A Theoretical Justification of the Inclusion of Funding Costs in the Evaluation of Financial Contracts
The main risks of an FX options portfolio
CreVar: the toolkit to monitor and measure credit portfolio risks
Some Practical Issues in FX and Equity Derivatives
Smile-consistent CMS adjustment in closed form: introducing the Vanna-Volga approach
Pricing of derivatives contracts under collateral agreements: liquidity and funding value adjustments
Sight deposit and non-maturing liability modelling
Consistent pricing of FX options
On the dynamic replication of the DVA: do banks hedge their debit value adjustment or their destroying value adjustment?
Pricing of collateralized derivatives contracts when more than one currency are involved: liquidity and funding value adjustments
Liquidity Buffer Risk Management
Interrelations amongst Liquidity, Market and Credit Risks - some proposals for integrated approaches
Financial Sector Bond Yield Curves
Analytical pricing of CDOs in a multi-factor setting by a moment-matching approach
Pricing swaps including funding costs
Funding, liquidity, credit and counterparty links and implications
Implementing CCR and CVA in a Primary International Bank
Counterparty risk. Wrong way risk and liquidity issues
Committed credit lines: pricing and liquidity management
An Introduction to Counterparty Risk
A Framework to Consistently Monitor Funding Costs and Transfer Them into Pricing
A Framework to Measure and Manage the Prepayment Risk of Mortgages
Analytical credit VaR with stochastic probabilities of defaults and recoveries
Un Early Warning Indicator per la Misura del Rischio di Controparti Istituzionali Implicita nei Dati di Mercato
Basel II second pillar: an analytical VaR with contagion and sectorial risks