By Charlie Browne, Head of Market Data and Risk Solutions at GoldenSource
Around this time 10 years ago, a certain investment bank’s stock plummeted amid concerns that its short-term liabilities were far greater than its liquid assets. The crucial issue Lehman Brothers failed to address, was how much capital it needed to hold. Yes, that all important difference between assets and liabilities.
Typically, banks need to review their capital for operational, credit and market risk. And a decade on from Lehman’s demise, it is assessing the latter which has triggered a set of rules forcing banks to calculate exactly how much capital is needed to protect themselves from sharp price falls. These prescriptive and global measures, more commonly known as the Fundamental Review of the Trading Book (FRTB). Despite the recent news that FRTB will be delayed beyond 2019, banks can ill afford to kick FRTB into the long grass. Due to the sheer scale and complexity the FRTB framework, firms need to start trying to work out exactly how much cash will be needed to underpin their market risk.
The difficulty, particularly for banks operating in traditionally less liquid and emerging markets, is assessing which of their diverse range of assets hold the most risk. A prime example is a bank based in APAC, where there is neither a single currency such as the euro, or a default reserve currency like the U.S. dollar for transactions. A common challenge a bank like this faces is trying to start with FRTB calculations, such as assessing the value of assets at risk (VAR), before shoe-horning in the vital information that determines the asset’s value. It is the equivalent of building a house on sand instead of bedrock. Or to put it another way, taking the Lehman Brothers approach to tackling FRTB.
The point that so many firms are struggling to grasp is that doing the calculations, from expected shortfall to risk weighted sensitives, is not the main issue. The real challenge is assembling the right information to underpin the calculations. Call it taking the high-end builders approach to FRTB – laying the foundations. Easily said, but what does it look like and how can it be done?
Most of the FRTB calculations require the marriage of market and risk data, but historically, banks have struggled to achieve this without introducing errors. And with over 10 years’ worth of market data requiring assessment under FRTB, many now face an unprecedented challenge. Without collating this backlog of information, and without ingesting new data from the traditional markets data vendors, banks will not be able to identify and address any non-modelable risk factors (NMRFs). It is these NMFRs that have the biggest effect on whether trading can be done with a smaller pool of capital set aside based on the internal model approach. Or whether trading can be carried out under higher capital restraints which could lead to lower profitability.
Also, if a bank wants to ensure its calculations are fully auditable, it needs to be able to pull together and store market, position and risk data. This includes intel such as the contributor of the market data, its sensitivity, and exactly when it was distributed. A bank, as a case in point, may well have a portfolio of different interest rate positions. In this situation, a risk officer needs to fully understand the nature of each position. Whether measured in credit spreads or basis and volatility points, banks can only be confident in carrying out accurate FRTB calculations by understanding the market and risk data points that help quantify the difference between positions.
Even all these years on, many still struggle to fully comprehend the Lehman saga. It’s hard to imagine how, if FRTB was enforced way back in the late 2000s, simply ignoring key information underpinning calculations for mortgage backed securities would have made life easier for those taking the decisions that ultimately, changed the world. One thing’s for certain, any bank continuing to build their FRTB solutions on sand, as opposed to a bedrock of data, will soon find, as Lehman’s did, that its assets may not be enough to cover its liabilities.
Sunak to give UK Infrastructure Bank £12 billion of capital in budget
LONDON (Reuters) – British finance minister Rishi Sunak is expected to announce an initial 12 billion pounds of capital and 10 billion pounds of guarantees for the new UK Infrastructure Bank in his budget statement next week, the government said on Saturday.
It said this will help the bank, which will launch in the spring and operate UK-wide, unlock billions in private finance to support 40 billion pounds of infrastructure investment.
The bank will offer a range of products, including equity, loans and guarantees, which can be tailored to support the needs of private sector infrastructure projects, in sectors such as renewable energy, carbon capture and storage and transportation, the government said.
It will also offer infrastructure loans to mayors and local authorities at low rates to help fund projects.
“We are backing this bank with the finance it needs to deliver modern infrastructure fit for the 21st century and create jobs,” said Sunak.
The government said he is also expected to commit a further 375 million pounds to co-invest alongside the private sector in high-growth, innovative UK firms.
While Sunak’s March 3 budget will include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown, he will also probably signal tax rises ahead to plug the huge hole in the public finances.
In an interview with the Financial Times, Sunak said he would use the budget to level with the public over the “enormous strains” in the country’s finances, warning that a bill will have to be paid after further coronavirus support.
($1 = 0.7178 pounds)
(Reporting by James Davey; Editing by Toby Chopra)
SoftBank reaches settlement with former WeWork CEO Neumann
(Reuters) – SoftBank Group Corp said on Friday it has reached a settlement with WeWork’s special committee and the company’s co-founder and former chief executive, Adam Neumann, putting to rest a legal battle dating back to 2019.
SoftBank, the new owner of the office-sharing firm, did not disclose terms of the settlement. Media reports earlier this week indicated the deal includes a nearly $500 million cut in Neumann’s payout from SoftBank.
The legal tussle between SoftBank and Neumann started in 2019, when SoftBank agreed to buy around $3 billion in WeWork stock belonging to Neumann as well as current and former WeWork employees. SoftBank later contested its obligation to purchase the shares.
Under the new settlement, SoftBank will purchase around half the shares it had originally agreed to buy, a source familiar with the talks had told Reuters on Monday.
The settlement is also expected to clear the decks for WeWork as it reportedly pursues a public listing by merging with a special purpose acquisition company (SPAC).
“This agreement is the result of all parties coming to the table for the sake of doing what is best for the future of WeWork,” said Marcelo Claure, executive chairman of WeWork and CEO of SoftBank Group International.
SoftBank, which poured more than $13.5 billion into WeWork, was pulled into the legal dispute with directors at WeWork after backing out of the $3 billion tender offer agreed when it bailed out the office-sharing firm following a flopped IPO attempt.
(Reporting by Shariq Khan in Bengaluru; Editing by Richard Pullin)
Banks weigh up home working – the new normal or an aberration?
By Lawrence White, Iain Withers and Muvija M
LONDON (Reuters) – As the finance industry prepares for life post-pandemic, commercial banks are moving quickly to harness working from home to cut costs, while investment banks are keen to get traders and advisers back to the office.
HSBC and Lloyds are getting rid of as much as 40% of their office space as an easy way to make savings when bank profits have been crunched by the pandemic.
But there are concerns that remote working does not benefit everyone. Junior staff miss out on socialising and learning opportunities and there are also risks home working can entrench gender inequality.
At investment banks, where long hours in the office were the norm pre-pandemic, bosses say they want most people back where they can see them.
HSBC plans to almost halve office space globally, as it aims to squeeze more use out of the remaining space and increase the number of staff per desk from just over one to closer to two.
Britain’s biggest domestic lender Lloyds plans to shrink its office space by a fifth within three years. Standard Chartered will cut a third of its space within four years, while Metro Bank said it would cut some 40% and make more use of branches.
“We’ve had a period where flexible working has been tested in full, with about three quarters of people not based in offices as we used to call them, and the business has performed remarkably well,” Andy Halford, Standard Chartered CFO, said.
But major investment banks take a different view, with Goldman Sachs Chief Executive David Solomon pouring cold water on the potential of remote working.
“It’s not a new normal. It’s an aberration that we’re going to correct as soon as possible,” he told a Credit Suisse conference on Wednesday.
Barclays CEO Jes Staley, who last year said he thought the days of 7,000 employees trudging into its Canary Wharf headquarters were numbered, is also unwilling to commit for now to large office closures.
The Barclays boss has said the bank had “no plan” to make a major real estate move as Britain’s prolonged third lockdown had shown the strains of working from home.
Nick Fahy, CEO of online lender Cynergy Bank, said working over screens often could not compete. “You might have a disagreement on this, that or the other but actually over the coffee machine or over a glass of wine or a bit of lunch, issues can be resolved.”
Some banks have acted quickly because they are used to flexing workforces in line with economic cycles, particularly in investment banks, Oliver Wyman principal Jessica Marlborough said.
But some are waiting on analysis of staff productivity changes before making final decisions, while others were mindful junior staff may still prefer going into offices, she said.
Banks are also concerned women may lose out from the shift to remote working.
“We thought the pandemic would be a big leveller for women. But actually what we’re starting to see is it’s extremely challenging to get women to move jobs in a pandemic,” Marlborough said.
“Banks were making progress in hiring a more balanced workforce in terms of gender and other metrics, but they’re actually struggling now (as banks are finding) they (women) are less likely to seek out a new job.”
Union leaders said part of the reason was that some women are juggling more childcare responsibilities during the pandemic.
Dominic Hook, national officer for UK union Unite, said banks must ensure working from home is voluntary, use of surveillance tools is limited, and employers respect staff hours so work does not spill into evenings and weekends.
“Our concern is that it won’t actually be a choice and that banks will pressure staff to work from home,” Hook said.
There are also concerns hybrid working will favour employees who visit the office more regularly, as they can spend more time in person with colleagues and managers, said Richard Benson, managing director at Accenture Interactive.
The staff most likely to go back to the office are traders, bank executives said, while back-office functions such as finance, risk management and IT will spend more time working remotely.
In Germany, Deutsche Bank said it had been challenging to adapt home office spaces for traders and expected many will want to return, but not all.
“We will pay more attention to the personal circumstances at home. Dealers also have children or parents in need of care. We have become more sensitive,” said Kristian Snellman, Deutsche Bank’s head of investment banking transformation for Germany and EMEA.
The trend to shed offices predated the pandemic as many banks made cuts after the 2007-09 financial crisis. Some have already made moves as a result of the pandemic, such as NatWest, which shut its tech hub in north London last summer.
Retained offices are being remodelled, with desks removed to make way for collaboration and break space such as coffee areas, gardens and libraries, property consultancy Arcadis said.
“It’s not just about adding a ping pong table and table football and hoping it will work, it’s about making sure people get downtime,” said Sarah-Jane Osborne, head of workscape at Arcadis.
David Duffy, CEO of Virgin Money, said the bank is among those planning to strip out office cubicles.
“The world of large-scale populations returning to a tall skyscraper building to come in and do their e-mail in the office doesn’t make any sense,” he said.
(Reporting By Lawrence White and Iain Withers in London and Muvija M in Bengaluru, Additional reporting by Patricia Uhlig in Frankfurt. Editing by Rachel Armstrong and Jane Merriman)
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