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Journal 37: Cass-Capco Institute Paper Series on Risk

It’s already been an eventful year. From a new crisis in the Eurozone, to fresh controversies that continue to impact the reputation of the industry, risk continues to dominate and shape the world of finance. These issues require broad and bold changes in operating models and processes. At the same time we can’t forget that broad strokes also require detailed architectural and financial engineering. We hope that some of the detailed papers in this edition unravel the complexities inherent in any elegant solution.

Take regulation. One thing that everyone agrees is that the pressure and complexity associated with new directives isn’t going to go away any time soon. No surprises then that two of our papers examine the latest developments in this area. Firstly, the optimization of Risk Allocation under CCPs with EMIR (Rodrigo Zepeda), and liquidity challenges posed by Basel III (Robert Fiedler and Michael Mahlknecht). The more general and extended discussion on stress testing by Michael Jacobs, Jr. is another response to regulation, as the need for robust stress testing procedures continues to preoccupy the industry.

Issue 37 also takes us into new territory. Regulation isn’t the only force shaping the financial industry and banking in particular. The importance of reporting, for example, is obvious given that economic and financial decisions are often taken based on this information. That’s why we’re delighted to publish the article by Sandeep Vishnu and Larry Taylor which examines the challenges in this space and shines a spotlight on 10 common pitfalls in risk reporting.

More generally, the current emphasis on commercial banking, as opposed to investment banking, prompts the question of how the retail banking system can evolve to face contemporary challenges. We address this point in two articles. Firstly, a paper by Jan Stüve that looks at core transformations in retail banking, then, more generally, in the white paper on industrialization by Ido Gileadi, Stephen O’Sullivan and Christopher Hamilton.

This issue also contains a cutting edge section where we collect articles of a high technical level focusing on specific methodological issues. In this issue we look at FX volatility adjustment for simulation, by Alexei Kondratyev, who also wrote a paper on simulation in issue 36. We also publish a paper by Louise Potgieter and Gianluca Fusai, proposing a model for sovereign risk that includes regime switches, embedding fundamental economy changes in the analysis of sovereign credit risk.

Journal Articles