Libor switch, US capital problems and operating in lockdown

Bruised, not broken: execs say Libor switch on track despite Covid

Compressed timeline for transition may leave smaller firms struggling to meet end-2021 deadline

How UBS kept workers plugged in during the pandemic

Swiss bank’s A3 system offers a blueprint for remote working

US banks face capital hit from resurgent advanced approaches

Banks pushed onto internal models wrestle with procyclical capital charges

COMMENTARY: How close was it?

Operational problems spiked in late March as the coronavirus pandemic accelerated. The combination of rapid evacuation of offices and record-high market volatility put institutions around the world under pressure. Risk.net reported on this before and this week looked at how one bank coped, and at how close those operational problems came to causing a systemic crisis.

UBS seems to have done well – the Swiss bank made the switch to a virtual desktop system some four years ago. Most banks use virtual private networks, in which employees working remotely have the software they need on their laptops, and connect with the bank through an encrypted “tunnel” – meaning they can work as though in the office. Virtual desktops mean the software is centrally held, in a server or on the cloud – the employee’s laptop is simply a “thin client” that accesses the software as required. It’s more complex to implement, UBS says, but makes updates easier.

Whether or not UBS considered this sort of scenario at the time, it seems to have ended up with a system that’s better than most at handling sustained periods of remote working. This is an area where business continuity has struggled in the past, notably in natural disasters such as 2012’s Hurricane Sandy in New York, when evacuation plans aimed at handling absences measured in days started to flounder as days stretched into weeks and months.

But the acute phase of the pandemic in late March was harder to handle. Bank of America found itself relying on manual position transfers; JP Morgan started running out of time for processing trades at the close of each day. Known bottlenecks became exacerbated by poor communications and staff shortages – the risk of a major operational loss became significant.

In the months ahead, more will be learnt about the events of those hectic weeks. Banks need to be alert to what they have learned from this crisis, by running their own internal lessons-identified process, and talking (at a suitably safe distance) to their peers. The next operational crisis may be more severe even than this one, and provide far less notice. At least when it hits, the industry will now have the advantage of experience – if it chooses not to squander it.

STAT OF THE WEEK

According to data from the International Swaps and Derivatives Association, more than $60 trillion of US dollar Libor swaps have traded year-to-date. SOFR swaps have yet to register half a trillion dollars. Average daily volume in SOFR futures traded at CME saw a huge surge at the height of the Covid-19 pandemic but was cut in half in April and May, though month-end open interest remains steady.

QUOTE OF THE WEEK

“The largest banks are likely going to have to make business decisions about which customers to prioritise, and there are going to be some that don’t get the same level of information. There’s litigation risk – if the Libor transition results in a value transfer to a bank and a borrower isn’t provided with what it considers to be enough information, there’s a chance they’ll sue that bank” – Chris Bender, Chatham Financial