The Changing Face of Global Risk

The following is a Project Syndicate excerpt from an op-ed written by NYU Stern Professor Nouriel Roubini on Project Syndicate:

roubiniThe world’s economic, financial, and geopolitical risks are shifting. Some risks now have a lower probability – even if they are not fully extinguished. Others are becoming more likely and important.

A year or two ago, six main risks stood at center stage:

  • A eurozone breakup (including a Greek exit and loss of access to capital markets for Italy and/or Spain).
  • A fiscal crisis in the United States (owing to further political fights over the debt ceiling and another government shutdown).
  • A public-debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt/GDP ratio).
  • Deflation in many advanced economies.
  • War between Israel and Iran over alleged Iranian nuclear proliferation.
  • A wider breakdown of regional order in the Middle East.

These risks have now been reduced. Thanks to European Central Bank President Mario Draghi’s “whatever it takes” speech, new financial facilities to stabilize distressed sovereign debtors, and the beginning of a banking union, the eurozone is no longer on the verge of collapse. In the US, President Barack Obama and Congressional Republicans have for now agreed on a truce to avoid the threat of another government shutdown over the need to raise the debt ceiling.

Read the entire opinion piece here.

Posted in Market Risk, NYU Stern, Sovereign Risk | Tagged , , , , | Leave a comment

Professors Robert Engle & Viral Acharya Warn that European Stress Test Risk Measures are Flawed

engle.acharyaOn the release of the US Fed’s latest bank stress tests, NYU Stern School of Business Nobel Laureate Robert Engle and Professor of Finance Viral Acharya warn that European regulators’ stress tests miscalculate the amount of systemic risk banks will contribute to the global financial system in the event of a future financial crisis.

In a new research paper, the NYU Stern professors indicate that stress tests would be more effective if capital requirements relied on total assets and on market risk, a measure they call SRISK. Currently, European regulators use a static risk-weighted approach that fails to capture the increase of risk over time and that allows banks to skew their risk-weighted assets to meet regulatory capital requirements. While US regulators still use a risk-weighted approach, they’ve made better assumptions on net bank profits/losses in stress scenarios and have added a simple leverage ratio.

However, the authors argue that SRISK is the optimal measure for both the US and Europe, and publish a weekly ranking of banks by SRISK in the NYU Stern Systemic Risk Rankings in the Volatility Institute’s V-Lab, which Professor Engle directs.

“SRISK represents the expected amount of capital an institution would need to raise in a crisis like the last one in order to restore its capital ratio. We define a crisis as a 40 percent drop in the market equity index over six months. Importantly, our measure implicitly incorporates the asset risk of the firm as a whole, versus the current asset-by-asset approach used by regulators,” said Professor Robert Engle.

To support their recommendations, they analyzed the European Banking Authority’s (EBA’s) 2011 stress tests, which were followed by a global economic downturn. They find:

• Risk-weighted assets are inconsistent and inadequate measures that produce an incorrect ranking of the required capitalization of banks in stress tests.
• V-Lab’s measures always appear more severe than the EBA stress test outcomes. For all stress tests, the rank correlation between V-Lab and stress test outcomes increases considerably when risk-weighted assets, the denominator of capital ratios, is replaced by total assets and market risk (SRISK).
• If the EBA had used total assets instead of risk-weighted assets, the required capitalization of 53 EU banks would have increased from 1.2 billion Euros to 390 billion Euros.

“We recommend that regulatory stress tests complement their assessment of bank and systemic risks by using the simple leverage ratio-based and market-based measures of risk. We support the new Basel III Tier 1 leverage ratio, but this has not yet been incorporated into the US or European stress test design,” said Professor Acharya.

Download a PDF of the paper here.

Posted in Market Risk, NYU Stern, Regulatory Risk, Systemic Risk | Tagged , , , , , | Leave a comment

NYU Stern Risk Symposium May 31, 2014: Save the Date!

Please join us for the 2014 Risk Management Symposium, hosted by the NYU Stern MS in Risk Management Program. Saturday, May 31, 2014 starting at 8:00am. Speakers include John Chambers, Deputy Head of Standard and Poor’s Sovereign Ratings Group and NYU Stern Professors Michael Posner, Bruce Tuckman and Viral Acharya. More details to come!
Symposium 2014 flyer

Posted in MS in Risk Management Program, NYU Stern | Tagged , | Leave a comment

Professor Ed Altman’s Research on Bond Defaults is Cited

The following is an excerpt from Forbes.

ealtmanIf Energy Future Holdings files for bankruptcy, a buying opportunity may arise in the iShares iBoxx High Yield Corporate Bond ETF (HYG). This would be strictly a short-term trade, appropriate only for aggressive risk-takers, given that high yield bonds are currently overvalued on fundamental grounds.

On March 13, Bloomberg reported that privately held Energy Future was close to obtaining commitments from lenders for approximately $7.2 billion of loans, as part of a plan to achieve a swift reorganization in bankruptcy. This news suggests that the Dallas-based company is close to filing under Chapter 11 of the Bankruptcy Code.

If Energy Future does seek protection under the Code, it will be an anticlimax. Way back in August 2009, Moody’s Investors Service downgraded the company to Caa3, a rating that implies a greater than 25% probability of default within one year. (In 2010 Moody’s withdrew its rating altogether.)


Like the rating agencies, the market has long perceived a high risk of default in Energy Future’s bonds, which trade under the ticker TXU. The TXU bonds in the BofA Merrill Lynch U.S. High Yield Index currently trade at an average price of $56. By comparison, last year’s defaulting bonds were quoted at an average price of $54 shortly after default, according to Edward Altman of New York University.

Read the entire Forbes article here.

Posted in Bankruptcy, Credit Risk, NYU Stern | Tagged , , , , | Leave a comment

Professor Viral Acharya’s Research on Stress-Testing European Banks is Cited

The following is an excerpt from the Financial Times entitled “Europe Should Say No to a Flawed Banking Union” by Wolfgang Münchau:

Viral Acharya, NYU SternThere are two classes of compromise in political life. In the first, your ultimate aim is sweeping change, such as switching the side of the road on which your country drives; but, in the name of expediency, you sacrifice important principles and gradually try to phase in the new rules. This is deadly.

The other involves settling for as much as you can get even when it is less than you want. This is not great either. But often it is good enough to leave everyone a little better off.

The art of the second kind of compromise has been the essence of political life in the EU. The proposed legislation on banking union, however, is not of that kind. I have been hesitating to make this call but I now believe that it would be best for the EU and the eurozone if this legislation were ditched altogether.

The matter is now in the hands of the European parliament. A deadline for a compromise in the negotiations between finance ministers and parliamentary representatives is approaching fast. The parliamentarians should simply say no to the proposals and walk away.


A detailed study by financial economists Viral Acharya and Sascha Steffen came up with an estimate of €510bn-€770bn for the shortfall. But this range relates to only 109 banks out of the 128 that would be subject to ECB supervision. I doubt the ECB will come up with a number anywhere near this high. It would require lots of public money. The EU is not prepared for that.

Read the entire article Financial Times article.

Posted in Market Risk, NYU Stern, Sovereign Risk | Tagged , , , , | Leave a comment

GDP Alumni Event with Prof. Walter Featured on the NYU Stern Homepage

Walter home pageOn Friday, March 7, 2014, Professor Ingo Walter spoke to approximately 80 executives comprised of MS in Risk Management students, MS in Global Finance and Stern alumni, and members of the Hong Kong Society of Finance Analysts gathered in Hong Kong on March 7. The event was the first session of the Global Finance Seminar Series 2014 offered at HKUST by the MS in Global Finance program.

Professor Walter, who is one of the founding academic directors of the MS in Global Finance program as well as the founding academic director of the MS in Risk Management program, discussed the complex and dynamic issues that confront the global asset management industry such as risk management, regulation and governance, operations and technology.

From his latest publication, Global Asset Management: Strategies, Risks, Processes and Technologies, Professor Walter addressed the inception of the book, stating, “You really cannot be taken seriously unless you emphasize data.” Professor Walter collected the thoughts of experts – insiders as well as outsiders with no conflicts of interest – on the complex and dynamic issues that challenge the global asset management industry.

NYU Stern Website

Posted in MS in Risk Management Program, NYU Stern, Regulatory Risk, Uncategorized | Tagged , , , | Leave a comment

Professor Viral Acharya on Fire-Sale Risk in Financial Markets

The following is an excerpt from Bloomberg Businessweek:

Viral Acharya, NYU SternWall Street’s biggest firms are close to agreeing on a plan that would safeguard the financial markets from the crippling fire sales that engulfed Lehman Brothers Holdings Inc. and Bear Stearns Cos.

By doing so, the participants seek to reach a solution to what the Federal Reserve sees as the last systemic risk in the $1.6 trillion-a-day market for short-term funding yet to be addressed: the potential for questions over a bond dealer’s liquidity to unleash a wholesale dumping of assets that causes a crisis of confidence in the financial system.


“The Fed is right to worry about fire-sale risk,” Viral Acharya, a finance professor who focuses on liquidity risk and regulation at New York University’s Stern School of Business, said in a telephone interview on Feb. 25. Lehman and Bear Stearns showed the consequences when “creditors in the repo market started worrying about these counterparties.”

Read the entire Bloomberg Businessweek article here.

Posted in NYU Stern, Systemic Risk | Tagged , , , | Leave a comment

Professor Nouriel Roubini Discusses Political Uncertainty in Emerging Markets

The following is an op-ed titled “Emerging-Market Risk and Reward” by NYU Stern Professor Nouriel Roubini:

roubiniOne definition of an emerging-market economy is that its political risks are higher, and its policy credibility lower, than in advanced economies. After the financial crisis, when emerging-market economies continued to grow robustly, that definition seemed obsolete; now, with the recent turbulence in emerging economies driven in part by weaker economic-policy credibility and growing political uncertainty, it seems as relevant as ever.

Consider the so-called Fragile Five: India, Indonesia, Turkey, Brazil, and South Africa. All have in common not only economic and policy weaknesses (twin fiscal and current-account deficits, slowing growth and rising inflation, sluggish structural reforms), but also presidential or parliamentary elections this year. Many other emerging economies – Ukraine, Argentina, Venezuela, Russia, Hungary, Thailand, and Nigeria – also face significant political and/or social uncertainties and civil unrest.

And that list does not include the perilously unstable Middle East, where the Arab Spring in Libya and Egypt has become a winter of seething discontent; civil war rages in Syria and smolders in Yemen; and Iraq, Iran, Afghanistan, and Pakistan form a contiguous arc of volatility. Nor does it include Asia’s geopolitical risks arising from the territorial disputes between China and many of its neighbors, including Japan, the Philippines, South Korea, and Vietnam.

Read the entire article on Project Syndicate here.

Posted in NYU Stern, Sovereign Risk, Systemic Risk | Tagged , , , | Leave a comment

Professor Viral Acharya on China’s Debt Fueled Growth Slowdown


Posted in Market Risk, NYU Stern, Sovereign Risk | Tagged , , , | Leave a comment

Professor Ingo Walter’s Research on Investment Management Technology is Highlighted

The following is an excerpt from The Wall Street Journal: 

iwalterSystems prohibit timely launches of new investment products and hinder firms from keeping pace with regulatory demands and innovation

SimCorp, a leading provider of investment management solutions and services for the global financial services industry, has published a new white paper, titled “Catalyst or Catastrophe: The Impact of IT Systems on Sustainable Business Performance.” The paper, authored by Ingo Walter, Seymour Milstein Professor of Finance, Stern School of Business, New York University, is part of an ongoing series of industry thought leadership compiled and published by SimCorp.

In the paper, Walter draws from a multitude of recent research to establish the clear relationship between the state of a firm’s investment management technology and its future business health. IT infrastructure, Walter writes, has emerged as a major source of competitive advantage in today’s product-saturated, high volatility and low return atmosphere.

Read the entire article in The Wall Street Journal.

Posted in NYU Stern, Operational Risk | Tagged , , , , | Leave a comment