Year 2008 was a humbling and significant event for the Investment Banking and Risk Management professions. Many epitaphs will be written for legendary institutions that disappeared overnight and will be spoken about for decades to come in terms of the crunching global impact and the associated learnings. About $650bn of sub-prime bonds outstanding in March 2008, about 75% of them being rated triple A at issuance, and banks raised around $600 billion in 2008 worldwide to survive. There is also a global development with wider and long term implications on the role of the Governments and Sovereign Wealth funds in Risk Management ecosystem.
The ongoing global credit crisis and the systemic risk tsunami is leading to a review and potential overhaul of the regulatory frameworks around the world. Combined with the global and pan asian $5 trillion regulatory interventions to help deal with the global economic and financial turmoil, current developments will reshape the financial markets of the future.
GRM – Global Risk Mgmt or Governments Risk Mgmt with a $5 trillion plus kitty:
With US floating the Aggregator bank idea in Jan 2009, there is a fascinating convergence of free markets and role of Governments as Risk Managers of last resort. There is an ongoing global risk management effort that although coordinated in some parts (e.g. G7, EU) and disparate in other parts of the world, does show signs of an orchestrated and coordinated effort. The different measures listed below really being the tactical components of a broader and longer term Governments Risk Management effort to rescue firms and economies:
1. Unprecedented direct intervention by Government bodies and regulators like FDIC in overnight in takeover/shotgun sales of financial institutions
2. Unprecedented but time bound Governments pledge to guarantee all loans and deposits
3. Bailouts plans such as US TARP
4. Stimulus packages
5. Benchmark rates cut
6. Assumption of toxic securities
7. Equity stake and nationalization in extreme cases
8. Interbank and debt guarantees
10. Asset Restructuring body/Aggregator bank
Today, it is very rare to hear debates on the role of direct government intervention even in the strongest bastions of free market economies. In the past it had been very subtle support and interventions by Sovereign Wealth Funds, but never of the current scale.
Looking at the summary of the global risk management efforts of governments of some of the major developed and emerging economies around the world:
• USA – $850bn (6% of GDP) – $700bn TARP; $300bn guarantees, FedReserve rate cut to 1%, $1.3 trillion bank lending, $150bn stimulus package, ($500bn planned by new govt)
• China – $586bn (16% of GDP) – 2 yr stimulus comprising rural infrastructure, social services, railroads, airports, health, education, housing and more
• UK – $450bn (21% of GDP) – $311bn to exchange illiquid securities for govt. debt, $116bn to recapitalize, $389bn guaranteed new bank debt, $23bn tax breaks
• Russia -$209bn (12% of GDP) – $50bn credit line for Corp debt refinance, $88bn bank loans,$19bn stock market support
• Germany -$151bn ( 7% of GDP) – $101bn in new capital, $25bn bad loans cover, $504bn interbank guarantees, $25bn tax breaks
• South Korea – $80bn (9% of GDP) – $25bn stimulus, $55bn foreign exchange loans for exporters, $100bn guarantees for banks foreign exchange liquidity
• Japan – $68bn (1%of GDP) – 2 stimulus packages including tax cuts, tax breaks, credit guarantees, $322bn loan guarantees for small and midsize businesses
• France – $50bn (2% of GDP) – $13bn to recapitalize ($37bn more pledged), $403bn interbank guarantees
• India -$ 41b (5% of GDP) – $4bn loans to mutual funds, $37bn in bank loans due to reserves rate cuts
The GRM program around the world is committing to around $5 trillion plus with amounts committed being anywhere from 1% of GDP to a high of 21% of GDP in UK. Many countries GRM initiative include nationalizing failed financial institutions as well. So the GRM is a facet of Risk Management that will remain in forefront for years to come and CRO’s.
For me, some of the takeaways from GRM are:
- An additional dimension for CROs to deal with, if their institution is subject to GRM activities
- Lessons learnt from GRM will feed into a heavier touch for Regulators in industry Risk management
- The lessons learnt by governments around the world in rescuing” Too big to fail” firms will have an impact on the future viability and ambitions of the “financial supermarts” around the world.
- This GRM effort will have far reaching impact on the Risk Management role of governments and implicitly the role of Risk Management in society.
What do you think ?
Sai Sireesh is Director of Risk Management & Compliance Strategy & Solutions, Worldwide Financial Services for the Microsoft Corporation. Mr. Sireesh has over 18 years of global experience across Risk and Compliance Consulting, Financial sector Strategy and blueprints execution. He has worked in North America, Australia, Singapore, Malaysia, Philippines, Thailand, Indonesia and India, is a regular contributor to the Journal of Regulation & Risk, and has authored several global research studies and articles.