What good are risk disclosures anyway?
Regulatory filings and shareholder reports offered no heads-up of Archegos’ troubles
Large banks release thousands upon thousands of pages of information about their risk exposures in shareholder reports and periodic regulatory filings. Scouring these disclosures, as Risk Quantum is wont to do, reveals little about the threat posed by Archegos Capital Management. The family office of former New York hedge fund manager Bill Hwang, which blew up in late March, may inflict losses of up to $10 billion on its roster of bank counterparties, according to JP Morgan analysts.
Archegos itself is out of reach of US regulators. As a family office, it is exempt from most disclosure requirements. That’s a problem in itself, as it impedes analysts’ and watchdogs’ ability to pinpoint the source of certain highly leveraged positions. The UBS Global Family Office 2020 report says 87 of the largest family offices have assets totalling $142.4 billion – a huge blind spot for regulators.
Banks, meanwhile, are subject to a wide range of disclosure requirements. Still, the risk reports of those caught up in the Archegos implosion – Credit Suisse, Nomura, Goldman Sachs, Morgan Stanley and Deutsche Bank being chief among them – shed little light on their exposures to highly leveraged clients.
Yes, it’s possible to track their aggregate derivatives holdings. Among US banks, for instance, regulatory filings show that Goldman Sachs and Morgan Stanley had the largest portfolios of equity swaps – the instruments at the center of the Archegos calamity. But the counterparty credit risk (CCR) posed by derivatives isn’t broken down, making it hard to point to one portfolio over another as especially high risk.
Goldman Sachs, for instance, does not break out CCR exposures related to its trading activities from those linked to traditional lending in its Pillar 3 report. Neither does it segment these by probability of default (PD), like JP Morgan, Citi, and Bank of America. Furthermore, the subsidiary that houses its prime brokerage operations – Goldman Sachs & Co LLC – does not file separate risk reports.
Credit Suisse, in contrast, does break down its CCR by PD – but the data it discloses gives no clue that it had billions in swaps exposure to a highly leveraged investor. As of end-December, the bank said 90% of its CCR exposure to financial institutions covered by its internal risk model – $13.8 billion worth – had a PD of less than 0.15%. Given the size of its projected Archegos loss, it seems highly likely that this position was classified in this 0.15% bucket. Using just the Pillar 3 data, then, it would be impossible to predict that a huge blow-up was likely in the near future.
It may be too much to ask banks to produce more granular risk reports. Concerns that doing so would inadvertently give away the identity of clients and other business secrets are certainly valid. But the Archegos debacle begs two questions. One, are banks accurately filling in their Pillar 3 disclosures? And two, if these disclosures essentially gloss over risks that result in billions of dollars in losses, what good are they anyway?
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Our take
Another post-Libor rate aims to clear Iosco bar
After two rivals were slapped down by the benchmark overseer last year, will Axi fare differently?
Nvidia is growing up. It’s not settling down
Chip maker is a mega cap that doesn’t act like one
FX forwards dealers face added challenges in P&L analysis
Mark-out tools for forwards and swaps trading may not be a panacea
Can history resolve factor investors’ p-hacking questions?
Quants seek reassurance in the far distant past
Insurance double-hatters like Apollo can expect more scrutiny
Regulators are homing in on conflicts of interests at private-equity-owned insurers
Podcast: Lorenzo Ravagli on why the skew is for the many
JP Morgan quant proposes a unified framework for trading the volatility skew premium
Quants see promise in DeBerta’s untangled reading
Improved language models are able to grasp context better
Counterparty risk model links defaults to portfolio values
Fed’s Michael Pykhtin proposes using copula models to capture effects of margin calls on default risk