I wanted to share a crazy story.
Asset managers have to report risk ratios and to stay below limits. Sometimes, big 4 auditors are appointed to calculate those ratios.
One of them (no names here!) is using its "own" model to compute the risk you're taking on AT1/Coco bonds. 1/n
Asset managers have to report risk ratios and to stay below limits. Sometimes, big 4 auditors are appointed to calculate those ratios.
One of them (no names here!) is using its "own" model to compute the risk you're taking on AT1/Coco bonds. 1/n
I got puzzled when the report showed that I had two bonds (one rated BB+ the other BB), one with a risk of 4% and the other with a risk of 40% (just so that you know: for me the risk is 100%!!)
The numbers did not make any sense. So I investigated. Turns out this big 4 auditor (for all its clients worldwide) is relying on some model designed ages ago by someone who wasn't even graduated from college. I kid you not.
Every single client they have is "using" that model
Every single client they have is "using" that model
And again, this is just my view, but that model isn't even remotely reflecting the risk you are taking.
File under what I call "illusion of science".
It's not because it has fancy equations that it's reliable or that you should not challenge it.
Same for "it has a big name on it"
File under what I call "illusion of science".
It's not because it has fancy equations that it's reliable or that you should not challenge it.
Same for "it has a big name on it"
(& of course, supervisors are happy with it because it has fancy equations - so it must be true - and it's a big name - so surely they did a lot of research before using that model.)(Breaking news: they didn't.)
