Elizabeth A. Sheedy

Marketing derivatives: a question of trust

In 1994/95 the derivatives industry was rocked by a series of high‐profile derivatives disasters. For example, litigation between Procter & Gamble and Bankers Trust highlighted a troubled relationship between banks and corporate clients. Examines the success of relationship marketing in the derivatives industry in light of these events. Participants in the derivatives industry in Sydney and Hong Kong are interviewed to determine whether the watershed cases of 1994/95 caused, or were indicative of, a more widespread deterioration in relationships. However, the expected benefits of relationship banking have remained largely unrealized. Concludes that further work is needed to overcome the significant impediments to successful implementation of relationship banking.

Correlation in currency markets a risk-adjusted perspective

Abstract This paper examines the nature of correlation in the major currency markets from 1980–1996, after adjusting for risk. Currency correlations are found to have an autoregressive structure, similar to that for variance. However, evidence for a link between volatility and correlation, asymmetry in correlation and cross-market effects in volatility is unconvincing on a risk-adjusted basis. The study finds that complex multivariate specifications designed to capture such effects are of dubious value. More parsimonious specifications generally perform best, provided that they capture volatility clustering. The implications for asset allocation and hedging decisions are also examined.

Corporate risk management in Hong Kong and Singapore

Purpose – To better understand corporate risk management practice in Hong Kong and Singapore. To explore popular perception that use of derivatives in Hong Kong and Singapore lags that in the US. To explore possible speculative use of derivatives in these Asian countries. Design/methodology/approach - A survey of non-financial corporations using the format of the 1998 Wharton study. I investigated the extent to which derivatives are used, how they are used, and methods for their oversight. Findings - Derivatives are used more extensively in Hong Kong and Singapore than in the US. They are particularly popular for managing foreign exchange risk. Their use is more speculative than is common in the US; that is, market predictions play a significant role in the size and timing of hedge trades and derivatives are often used for active management of exposures. A lack of controls and management oversight (such as derivatives policies, regular valuations) is apparent, despite the extent of derivatives use. Research limitations/implications - Potential bias may have arisen due to the method used for recruiting survey respondents. In this study post-graduate students contacted and interviewed company staff, often based on their personal contacts. In contrast, the Wharton surveys have been mailed to potential respondents. Students may have been more likely to select companies that traded derivatives. The sample size (131 firms) is smaller than that of the Wharton studies, but probably sufficient to establish common trends. Practical implications - Need to address poor oversight of derivatives trading in order to prevent further disasters. Need to scrutinise the speculative use of derivatives to ensure that it is value-adding for firm owners. Originality/value - To highlight the extent of speculative use of derivatives in Hong Kong and Singapore. To encourage further scrutiny and controls over the use of derivatives by directors of and investors in non-financial corporations in these countries.

International compliance with new Basel Accord principles for risk governance

We assess international compliance with the Basel Committees 2010 guidance on governance of banking organisations. Based on an extensive examination of regulatory documents in selected advanced economies, we find that reform is incomplete in jurisdictions most affected by the financial crisis, and with the largest financial centres. In contrast, other countries less affected by the financial crisis have enacted risk governance reforms as protection against potential future contagion. We provide insights for policy-makers charged with improving governance at banks, and a richer understanding for international regulators as they revise the guidelines and aim for greater compliance at the national level.

RISK GOVERNANCE IN THE INSURANCE SECTOR—DETERMINANTS AND CONSEQUENCES IN AN INTERNATIONAL SAMPLE

We analyze the relation between risk governance, risk, and performance measures for a global sample of 107 insurance companies from 2004 to 2012. Our risk governance index (RGI) covers several Solvency II provisions and includes the existence of chief risk officer on the executive committee, risk committee characteristics, and board industry experience. We find that in the crisis period 2008–2009, firms with a higher RGI generally have lower expected default frequency. We conclude that during noncrisis years, risk governance does not have a risk-reducing effect but is positively associated with buy-and-hold returns, risk-adjusted performance measures, and Tobins Q. Our findings therefore support the role of risk governance as a business enabler rather than inhibitor. Insurance companies typically upgrade their risk governance following a negative shock, especially in countries that are well regulated and have weaker shareholder rights.

The Effect of Risk Governance in the Insurance Sector During the Financial Crisis - Empirical Evidence from an International Sample

In this study, we analyze the relation between risk governance and risk and performance measures for a global sample of 107 insurance companies from 2004 to 2012. Our risk governance index covers several Solvency II provisions and includes the existence of chief risk officer on the executive board, risk committee characteristics and board industry experience. We find that, in general, during the asset meltdown phase in 2008, firms with a higher risk governance index have lower tail risk and lower expected default frequency (Moody’s EDF). Controlling for time-invariant heterogeneity across firms using a fixed effects approach, we identify that during our sample period risk governance does not have a risk-reducing effect in general but is positively associated with risk-adjusted performance measures and Tobin’s Q. Our findings challenge the notion that risk governance is typically risk reducing but rather support the role of risk governance as a business enabler. During our sample period risk governance increased and our findings should encourage insurers to continue enforcing their group wide risk governance structures.

Can Risk Modeling Work

Does the 2007/08 market crisis herald the end of risk modeling and the empirical method? This paper supports the hypothesis that recent risk modeling problems were caused by the use of inappropriate risk models which are fixable rather than fundamentally flawed. An extensive analysis including the sub-prime crisis shows that GARCH-based risk measures offer a potential solution to these problems. The paper also explores some risk modeling issues that arose during the crisis such as the appropriate choice of sample size and how to incorporate dynamic feedback effects into a risk model used for stress-testing. I illustrate a stress-testing method that applies the GARCH approach but results in relatively stable capital requirements preferred by practitioners. This method appears to address some of the concerns raised by regulators with respect to stress-testing practices during the market turbulence and would result in more conservative gearing levels for financial institutions.

Risk management behaviour in banking

Risk management is now considered the responsibility of all financial services professionals, not just senior leaders or risk specialists. Very little is known about the role of staff in risk management, so the purpose of this paper is to, first, clarify what constitutes “desirable” risk management behaviour by financial services staff based on the practitioner and regulatory literature. Based on this understanding, the authors analyse the characteristics of those who are most likely to display such behaviour.,The paper analyses some 36,000 survey responses across ten banks headquartered in Anglo countries.,Desirable risk management behaviour at the employee level includes compliance but goes well beyond mere compliance to include speaking up, thoughtful engagement with and accountability for the risk management framework. The authors find a significant negative association between individual risk tolerance and desirable risk management behaviour. Older workers as well as those with greater seniority are more likely to report desirable risk management behaviour. The link between female gender and risk management behaviour is not supported after controlling for individual risk attitudes. The authors provide evidence that females who succeed in financial services do not conform to traditional female stereotypes.,Findings suggest financial institutions should hire/retain more older workers and those with lower risk tolerance to improve risk management. Hiring more females, however, is not likely to lead to better risk management.,The paper is the first to investigate risk management behaviour in financial services staff. The research exploits a unique, difficult to obtain data set.

Diversity in Financial Risk Management: Revisiting the Lehman Sisters Hypothesis

This paper scrutinises the supposed benefits of diversity for financial risk management on the dimensions of gender and age. Using employee survey responses from ten large banks we find that females are no more likely than males to manage risk well after controlling for individual risk attitudes. We observe wide dispersion of risk tolerance for both genders in the banking workforce. Gender differences in risk tolerance are decreasing in seniority, suggesting that female managers are very similar (in this regard) to their male counterparts. In contrast, older workers report more desirable risk management behaviour than their younger peers even after controlling for risk tolerance, suggesting that the benefits of experience for risk management go beyond just individual risk attitudes. To better understand the formation of business unit culture we also investigate the relationship between risk culture and demographics at the business unit level. We find no association between gender/age distribution of business units and their risk culture, nor between the gender/age of business unit leaders and their unit’s risk culture.

Reform Where It Is Least Needed: Diffusion of Post Crisis Risk Governance Regulation

Risk governance is arguably the most vital arena for post-crisis bank reform because it addresses the fundamental issues that drive the mismanagement of financial institutions. We assess the progress of reforms in bank risk governance in seven advanced economies and the EU five years after the Lehman Brothers failure and three years after the release of a ‘best practice’ benchmark in this field (BCBS, 2010). We find that the countries that have made the greatest progress in risk governance reform are not crisis countries and usually not those that host the largest global financial centres. Thus, reform tends to occur in the jurisdictions where it is least needed. We propose the ‘relative power hypothesis’ as the best explanation for this pattern of regulatory diffusion with some evidence to support the ‘consensus hypothesis’. Those countries where shareholder and manager power is strongest (Japan, Switzerland, UK, US,) are least able to implement fundamental reforms. The jurisdictions where depositor and taxpayer power is strongest (Australia, Canada, Singapore and EU ex-UK) have the most comprehensive risk governance regulation. The implications of the relative power hypothesis are not encouraging for achieving fundamental reform in banking or for the management of systemic risk.