Remodeling Operational and Financial Risks in the International Finance Industry
The international banking and finance industry sheered the industry structure at the event of the Barings collapse leading to the revision of the Basel I Accord by which jurisdiction falls under the Basel Committee on Banking Supervision. Unauthorized trading resulting to the impairment of the international banking industry calls into emphasis tools and techniques to design preventive solutions to assist financial management institutions in operational and financial management risks. This, in turn, results to avoid recurrence of similar bankruptcy incidents. This will require implementing a full scope of methodologies to focus its efforts. Operational risks which usually are independent from credit and market risks miss to implement a financial model strategy to extract from the merge employing altogether these risks and calculate separately the measure of each risk broken down to separate, auspicial factors. This seems to be a surfacing concern over credit and market risks that led to the recent financial downturn in 2007 despite the leveraged effectiveness in Basel II which provided mechanisms to overcome the risks involved.
Questions:
Amid the unavailability of an established financial model, what concepts may apply and in what ways prospective solutions may determine the collection, analysis and mapping processes related to operational risks improve the strategy to determine the explicit risk measure under each process when applied to the Barings crisis in 1995? In what ways and why do these differ from the Great Crisis of 2007 attribute to the housing market collapse in the United States that describes an enigmatic role the international banking industry played behind such collapse? Why? What are the comparative advantages and disadvantages to each operational risk factor when counter-referenced between these two crisis events? What best tool, solution or methodology with respect to each operational risk factors is most fitting or ideal to resolve the challenges faced on each crisis event and why? (Ramadurai et al, 2004, pp.1-4) If credit and market risks are reduced to their lowest performances possible under market tolerance levels, what possible solutions or tenets can mitigate operational risks and enhance leverage to an extent that could prevent a future recurrence of another financial crisis? Why?
What possible mechanisms are currently available can the Bank of International Settlements extend to their disposal towards formation of solutions which cater to challenges in credit, market and operational risks individually and under circumstances combining these risks in terms the effects they induce on portfolio management? Why? This question derives from the implication guidelines from reviews made which determine supervisors in the Basel Banking Supervision will have to devise oversight solutions to cater the deficiency in the international finance systems (Financial Stability Forum, 2008,p. 7).
What deficiency or discrepancy, and why do you think so, surfaced upon on the part of the Bank of International Settlements who was not able to compound effective ways to respond to the superfluous flow of credit enhancement mechanisms exercised among banks spurring into a disadvantage leading to the Great Crisis of 2007? Do you think, and why so, if yes, what steps if otherwise should have been taken under the capabilities of Basel II enabling to control from losses incurred attribute to nonsettlement of mortgage back securities and collateralized debt obligations which played a role culminating to the Great Crisis of 2007? Despite the superfluous credit enhancements on collateralized debt obligations, why do you think what factors, and why, have prevented to control credit enhancements under Basel II which otherwise would have been a lesson in the Barings crisis? In what ways does this relate to the creation of Basel III and why? What courses of actions should the central banks take in its role in policy formulation and implementation to prevent a possible recurrence and per se to this Crisis in specific? (Financial Stability Forum, 2008,p.9). What lessons from the shortcomings can be drawn in the exercise of sound corporate governance the Bank of International Settlements would take responsibility under the lure behind to accommodative macroeconomic conditions made to risk at high levels of credit enhancement values?
What possibilities do you think came short in the policy implementation motives in the US central bank system confident of the US mortgage industry during the housing boom in 2004 in affixing misaligned incentives and fraudulent practices in the subprime mortgage markets? There seems to be implicit information a non standardized approach exists in implementing financial risk tools not able to scale forecast losses based on available resources banks have. Therefore, how can Basel II and III reckon this challenge to ensure consistency of control and leverage among banks in suppressing weak control and managing credit, market and liquidity risks? Should this apply in addition to operational risks that contributed to the Great Crisis of 2007, what appropriate steps and measures need to be taken to control over balance sheet growth and over off-balance sheet risks. What policy elements in Basel II are deficient not able to control of these risks? What mitigating measures can serve as alternative within the constraints in Basel II, and why? What specific rules are conducive to be imposed upon the disposal of collateralized debt obligations in terms of tranch sizes and their derivatives inducing reference to the default, communication, operation, credit and market risks involved, and why?
Significant implications infer from the need to further improvements on Basel II implementation. What concepts linked to resilience measures may appropriately apply to redress inherent weaknesses and improve resilience and strengthen supervisory guidelines on liquidity management? What approach and why should the Bank of International Settlements take position in setting standards to determine liquidity and capital buffers in risk management models that served as inherent weaknesses in the international financial system? How and what effective approaches and solutions need to resolve issues in the following: misaligned incentives in the securitization chain amid the complex processes attribute to financial instruments and weakened compliance; lack in transparency of communication on securities risks; poor risk management practices in addressing securitization in general as well as market, credit and liquidity risks including insufficient stress test measures; the credibility attribute to credit rating usage.
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