This morning’s featured panel discussion at GARP includes several CROs and senior risk practitioners from Morgan Stanley, The Vanguard Group, Credit Suisse and Western Asset Management.
The first topic was VAR. VAR works in “normal markets.” There a question of what is the appropriate time window. One panelist remarked that it would be good to have better regulatory consistency on this issue: should companies be focused on a 1-year or 4-year timeframe, for instance?
VAR tends to distract you from the tails, and one panelist remarked that “you really need to stay focused on the tails” e.g. gap risk, liqudity risk, etc. The panelist continued to say that he’s really focused on the deep downside risk: how much money could the position/desk possibly lose. You have to be very dynamic in thinking about where you can be hit next.
The third panelist asserted, “I think VAR is worthless and pernicious and should banned,” noting that it’s not a coherent risk measure (99.9% VAR doesn’t handle a 1 in 200 year event). Also, the panelist pointed out that it doesn’t encourage diversification. He focused on scenario analysis but said that there is no easy answer.
Another panelist defended VAR as a tool that has its pluses and minuses.
The panelists then turned to the role of risk managers, and their role in predicting the future (in the context of the financial crisis). If risk is lack of information about the future, many companies failed to hedge when there was a very cloudy future (lack of information). One panelist noted that in many cases the risk management failure was more than just the technical capability of know what to do but actually a failure to be able to drive action.
The question of the changing regulatory landscape came up, with one panelist joking that CRO stands for Chief Regulatory Officer now. Another joked that he’s trying to stay away from the regulatory topic because they don’t know whether what they do will be “legal or illegal” under reg reform.
There was agreement that the FDIC has been very successful in carrying out their mission. But one panelist said that in the near term we don’t seem to on a path towards getting an effective systemic risk regulator. Another said that we’re creating systemic risk through regulatory uncertainty.
Tags: GARP Live Blogging