(1) In the late 1970s, rising inflation prompted the Federal Reserve to implement tightening monetary policies, leading to a sharp rise in short-term interest rates.

(2) The rise in short-term interest rates has pushed up the financing costs of savings and loans, reducing or even offsetting the spreads that savings and loan associations rely on to make profits.

(3) With the surge in short-term interest rates, and the continuous emergence of other attractive financial investment tools such as money market funds,

result

Savings and loans failed to manage their interest rate risk and suffered significant losses when interest rates moved in adverse directions.

Banking financial institutions should properly manage interest rate risks

Banks as naturally highly leveraged entities

Excessive pursuit of leverage before the crisis

At the same time, banks’ financing strategies bring fatal vulnerabilities to operations.

Specific instructions

(1) Radical investment model, high-risk business accounts for too much, and business is too concentrated

(2) The leverage ratio is too high and over-reliance on short-term financing

(3) Financial derivatives are overly innovative and the corresponding risk management is relatively weak.

(1) Business concentration is too high and risk diversification management is not carried out.

(2) There are weaknesses in the financing strategy. The main source of funds comes from the wholesale market of funds, and the source of funds is relatively single.

(1) Internal credit portfolio problems may trigger a financing liquidity crisis and avoid excessive concentration of the company's business.

(2) Correspondingly, financing sources should also be diversified.

Funding sources for long-term assets were excessively concentrated in short-term financing, the mismatch in asset and liability maturities and the sudden loss of market confidence jointly triggered Northern Rock Bank's liquidity crisis.

(1) Don’t “put eggs in the same basket”. Both the liability side and the asset side need to pay attention to risk diversification. Even if the products on the liability side are diversified, it is necessary to look at the root cause to see whether their sources are concentrated and do a good job in risk prevention and control.

(2) When developing interbank business, we must grasp the rhythm well. When the deposit and loan business encounters bottlenecks, seeking transformation in the financial market business is the way out for banks in the future.

Asset/liability management (ALM) decisions require trade-offs

The financial disaster suffered by the company stemmed from an asymmetric term structure of gains and losses, culminating in losses due to liquidity problems.

(1) The company should establish appropriate liquidity risk control and management measures

(2) Risk assessment should be based on stress testing with reasonable assumptions and limit the margin and number of positions.

(3) However, when using short-term to hedge long-term contracts, the strategy can only be successfully implemented if appropriate risk control is implemented.

(4) It is very important to choose the appropriate model for pricing and hedging

(5) Accounting and tax policies need to be considered when developing hedging strategies

It is possible to construct a strategy that chooses to make small profits over a period of time, but even with a less profitable strategy, there is still the possibility of significant losses.

(1) Do not rely too much on personal professional knowledge and integrity and self-discipline

(2) There is no “free lunch” and no over-investment

The company's basic investment philosophy is that "in the long run, unreasonable price differences between the same securities in different markets will inevitably disappear", and thus formulated a policy of "discovering abnormal market price differences through precise computer calculations and using leverage to amplify returns." Investment strategy process. Specifically, the company's main strategies are as follows:

When the Asian financial crisis broke out in 1997, LTCM believed that the market overreacted to the financial crisis, resulting in an excessively large interest rate difference between U.S. government bonds and bonds from developing countries, and that the interest rate spread would decrease and return to the historical average.

(1) The sharp increase in interest spreads and option volatility caused a large short-term loss of principal and the inability to meet margin calls, causing the company to face serious cash liquidity problems

(2) Behind LTCM’s high yield is the use of high leverage for large-scale transactions. When the market fails to fluctuate as expected, due to the existence of high leverage, there is not enough cash to maintain margin, and forced liquidation accelerates its losses.

(3) Both the valuation model and the trading model used have certain flaws.

(4) Although LTCM’s investments are global and the asset classes and trading strategies are different, the strategies are all based on the assumption that credit spreads and market volatility will decrease.

(5) The report disclosure of regulatory authorities is not complete enough, especially the lack of complete disclosure of derivatives positions and trading strategies.

(1) Companies should be familiar with the risks of investment strategies, especially liquidity risks

(2) When establishing derivatives positions, companies should not only meet the initial margin requirements, but also pay attention to potential liquidation costs and the risk of forced liquidation

(3) Promote counterparties to disclose their trading strategies, positions and other information to the maximum extent

(4) When assessing credit risk, stress testing should be used, especially comprehensive testing that highlights market risk and credit risk.

(5) Defects of VaR

(1) Excessive risk exposure: In credit derivatives transactions, JPMorgan Chase Bank’s derivatives holdings are huge, exceeding the capacity that the market can easily digest.

(2) Operational risk: The trading department can easily manipulate the pricing of derivatives, making the pricing more conducive to the bank reporting fewer losses and making the bank's income statement better-looking, and there are differences in the pricing of derivatives by different departments.

(3) The risk management culture is not in place: The management does not pay attention to the bank’s risk management, and violations are ignored or ended by raising the relevant risk limits.

(4) Model risk: A new model is used to reduce the requirements for risk management.

(1) Strictly manage proprietary trading, conduct real-time monitoring of risk exposures held, and strictly implement the risk limit system.

(2) Prudently assess the impact of transaction size on market liquidity.

Unauthorizedly constructed a large number of speculative positions in interest rate futures and options on the Japanese stock market, and used fictitious accounts to cover up his speculative behavior in the report, ultimately resulting in losses of approximately US$1.25 billion.

(1) Barings Bank allows Leeson to wear two hats, having the dual identities of trading director and back-end risk control department director.

(2) In fact, Leeson’s disguised “low-risk strategy” produced “huge returns”, which is very suspicious

(1) The company must have an independent trading backend to record the profit and loss status of transactions. The trading and settlement positions must be separated from authority and responsibility, and company employees with dual roles and identities are not allowed to appear.

(2) The company should build a complete supervisory control system and conduct a thorough investigation into the source of any unexpected profits (or losses).

(3) Companies also need to conduct thorough investigations into large-scale unexpected cash flows.

(1) Bankers Trust’s financial derivatives structure is too complex and customers are not fully informed of the nature of returns and risks.

(2) Inappropriate remarks made by staff members during telephone communications were published.

(1) The company needs to conduct fair transactions with customers and ensure adequate communication of information.

(2) The company needs to pay attention to the rigor in the external communication process.

The investment strategy of the fund manager is

(1) Using high leverage, borrowing short-term funds to invest in medium and long-term bonds, investing in complex structured securities and interest rate derivatives, the risk increases sharply. When the market interest rate deviates from the direction predicted at the time of the original transaction, heavy losses will occur.

(2) Fiscal funds are almost unregulated and do not need to calculate and publish the price of fund shares on a daily basis.

(1) The amount of investment risk should be proportional to the leverage ratio

(2) Financial derivatives can be used for hedging, but due to their complexity, new risks may arise when predictions are wrong.

(3) Strengthen the internal management of financial derivatives transactions.

(1) The bank’s operating scale and risk management should match its asset and liability scale

(2) Companies should be familiar with the risks of the products they invest in

(1) Limit the company’s investment scale.

(2) Understand the characteristics of investment products and conduct risk management in a timely manner.

Although Volkswagen has set specific emission control procedures for its diesel engines, these are only activated during regulatory testing and not during actual driving. Therefore, although nitrogen oxide levels met U.S. standards in regulatory testing, when the vehicle was actually driven, the nitrogen oxide levels in its emissions significantly exceeded U.S. standards.

The reputation of Volkswagen, the world's largest carmaker, especially in the U.S. market, has taken a serious hit.

The reputational impact of the incident went beyond the company itself to the extent that it affected other companies in the market.

Traditional corporate reputation refers to being able and will fulfill its commitments to counterparties and creditors, or that the company is a fair trader that adheres to ethical standards

With the rapid development of social networks, news can spread quickly and will destroy a company's reputation in a very short time.

Businesses are also under increasing pressure to publicly demonstrate their commitment to environmental, social and corporate governance best practices

(1) Corporate governance

(2) External audit

(1) Pay attention to the company’s internal management and improve the internal control mechanism.

(2) Strengthen external supervision.

Cyber ​​risk has become a crucial risk factor in financial market transactions

A large number of bank transactions are based on system operations, and these systems can be hacked

Financial institutions spend billions of dollars every year on their systems to make them harder to hack and more secure.

Strengthen internal and external supervision of network risks, and strengthen manual intervention for large abnormal transactions to prevent theft of funds.