RiskMinds 2010 – Day 3 – Financial Engineering Blueprint
December 9, 2010
Panel moderated by Ricardo Rebanato of RBS on "Determining The New Blueprint For Financial Engineering". It seems like Ricardo has been busy following up on his talk from last year (see post) with the release of his book on scenarios (no I am not on commission for this but thought it may be interesting to take a look at!).
Summary of main points from the panel debate:
- Regulators would like simpler models but simpler does not mean better, complex models do not mean worse.
- It is the thoughtful application of a model that is important, not the level of complexity in itself.
- Given the more complex world we live in, more complexity in modelling is both needed and desirable if things are to improve in risk.
- Some members of the panel thought that regulation had stifled innovation in risk models (as opposed to valuation models) through insisting on conformity of reporting. The innovation is limited since the regulators simply set the rules and then the game begins of the bank optimising against these rules.
- Evan Picoult of Citi disagreed with this, saying that his own group now look at historical events going back over 100 years for possible scenarios as opposed to the last few years (comment: interesting to see someone using more history as a complement to more forward-looking risk modelling)
- Riccardo asked whether there is a conflict between what a regulator wants (lack of risk) and what a rational CEO wants – should a CEO for example accept a level of risk of disaster for the bank of 1 in 50. Evan argued that the banks should be more transparent to allow investors in bank stock and bonds to decide and price-in the policies implemented by bank management.
- Only around 15% of the audience thought that greater pricing/valuation model validation would have changed the 2007-2009 crisis. John Hull said that he had received many emails trying to apportion blame in this way which he rejected. Concensus seemed to be the route cause was the lack of common sense over the mortgage market.
Good debate with Riccardo doing more than just moderating, but not a great deal new relative to recent years. In summary my feeling for RiskMinds 2010 was high quality speakers but a little subdued from the embarassment of 2008 and the anger against the regulators in 2009. Maybe we should all want more subdued risk management conferences but it will be interesting to see what 2011 brings and whether energy levels are up.