Market risk is one of the most difficult risks for financial firms and supervisors to deal with. It is the risk of financial loss from movements in the level or volatility of market prices such as equity prices, interest rates, credit spreads, foreign-exchange rates and commodity prices. All financial firms have a degree of market risk, which can be actively taken such as guaranteeing returns on an investment or be embedded in transactions such as those involving different currencies.
Prior to 2007-09, many banks built up large trading positions that they assumed to be liquid. When the financial crisis hit, many of these positions could not be traded, generating large losses and the capital buffers of the banks were insufficient to absorb the losses. Weaknesses in Value at Risk (VaR), the main measure of market risk used by banks since the early 1990s, were central to the problem. Used to manage market risk and allocate capital, VaR was, in the words of Lord Adair Turner of the United Kingdom’s Financial Services Authority, “completely and utterly wrong” when it came to providing sufficient capital in a crisis.
The objective of the workshop is to define market risk, introduce the sources of market risk, recognise how market risk is measured and managed by banks and for supervisory purposes, review the history of approaches to market risk taken by banks as well as the treatments for market risk developed by regulators and identify existing regulatory frameworks for market risk, including the latest revision, which becomes applicable in 2019.
The course is an introductory course that will assume limited knowledge of market risk. However some knowledge of financial instruments and banking products is assumed.