CheckRisk, the UK-based global risk manager and information provider, has taken the big step of offering financial institutions a free risk appraisal of their banking counterparties. The firm, which helped clients through the GFC in 2008, believe most institutions and big investors were “blissfully unaware” of the nature of counterparty risks until then. Nick Bullman, founder and managing partner, wonders whether the same thing will happen again.
Bullman, who is based in Bath and is loosely affiliated with the University of Bath, where he is a guest lecturer, asks whether financial institutions actually know how close to distress their major banking counterparties really are. He said: “We saw during the GFC how official ‘announcements’ were meant to shore up confidence in the system but actually had little relationship to eventual outcomes and we believe a science based factual approach is far more useful than rhetoric.”
CheckRisk, which has an Australian-based partner, Denis Carroll, a former super fund chief executive and funds manager, believes that the banking system is becoming increasingly stressed. The firm’s ‘distance-to-stress metric’ is currently showing levels not seen since the GFC. This contrasts with the European Central Bank press release of July 28 which claimed that the Euro banks “are well poised to withstand pandemic-induced stress”.
Carroll said that CheckRisk’s process, called ‘BankFox’, relies on a market-implied measure of distress looking at the pricing of equities and other financial instruments.
“The information implied in pricing and volatility is more reliable than that of central banks and credit ratings agencies due to their inherent conflicts of interest,” he said. “The process, which is offered for now on a complimentary basis, involves a third party providing CheckRisk with a list of banks with whom it transacts or are interested in monitoring.” The process would normally cost from A$1,820 a quarter for ‘institutional monitoring’ and A$5,460 a quarter for ‘situational awareness’. CheckRisk also provides bespoke portfolio monitoring and advice. ‘Institutional monitoring’ involves providing Risk metrics for selected institutions on a frequency that matches their risk management cycle. “More responsive than credit ratings and less volatile than CDS prices, ‘distance-to-distress’ measurements enable our clients to make more timely risk management decisions,” the firm says in one of its documents. The metrics estimate how far a bank is, for instance, from requiring re-capitalisation or an injection of funds. The score reflects both the inherent financial position of the bank and investors opinions.
‘Situational awareness’ involves providing the metrics for global and regional banking systems. “The wider perspective helps you to anticipate where risk is emerging, and identify safer locations for your holdings,” the document says.
Carroll said: “Clearly this will not be suitable for every financial institution, but those who have serious interactions with banks through the way they manage money would certainly stand to benefit by placing their banking relationships under independent scrutiny.“
He thought this might be particularly relevant for custodians managing super funds’ transactions.”
Greg Bright is publisher of Investor Strategy News (Australia)