New Risks for Banks

For years the market has prided itself on its ability to measure and manage a number of risks that are inherent within financial markets. Counterparty Risks, Operational Risks and those risks based on price movements have had countless amounts of attention and all have had a number of systems developed to assist in risk management. Today the world of risk management has been shown to be somewhat less sure then a year ago.

It now looks like the market has to revaluate its risk policies and systems and at least lower the benchmarks to ensure that financial institutions step in at an earlier stage. This is actually not a bad thing as some sobriety introduced to lending and trading would decrease volatility in the markets and allow investors to regain some confidence in financial market.

Risk between banks, once thought pretty secure, has been proved to be one of the greatest myths. The facts are frightening in that banks were actually unable to determine the true risks and whatever baseline measurement they used was totally inadequate.

The result of the banks inability to know or understand the real financial risk being undertaken by their peers is now evident with a total lack of confidence between banks that $700 billion is unable to rectify.

The banks rapidly need to stabilise their own business by co-ordinating and building transparancy. Perhaps this could be a new code of conduct that all banks sign up to until a more stable and secure business environment can be established. It is unlikely that governments alone can solve the problem, only alleviate the situation, while answers can be found. Anything less will threaten the stability of the financial system for many years to come.

What is now obvious is that it is impossible to categorise banks in the same way as one would, trading counterparties. The risk metrics for banks is now set at a ground zero level and data can now be compiled to build a risk assessment calculation which sets a new benchmark.

The once powerful banks that we all thought were secure just a short time ago have proven that their credit ratings were worthless and when it came to the crunch even they didn't believe them.

The markets now require a new risk measurement capability for banks, as part of the recovery process. The new risk assessment should extend deeply into the banks business, operations, running costs, assets and exposures and all this should be against their realised capital. Sounds familiar! Just like any business valuation that a bank might undertake in the case of an everyday loan request. Maybe we already know the risks and are not as far away as first thought!