The changing regulatory landscape and client fears for asset safety and the mitigation of counterparty credit risk have forced custodians to develop and provide in-house counterparty credit risk assessments, which is proving extremely difficult as several issues arise out of this, say experts.
In the developed world tighter regulations and higher capital requirements give clients comfort. However, at the same time, the network function is expected to also monitor counterparty risk, says Iain Mackay, Head of Network Management and Market Development at Royal Bank of Scotland. We are expected to come up with risk matrix or something that illustrates what the risk situation is about.
However, all panelists, including Ben Parker, Executive Director of Group Network Management Investment Bank at UBS and Phillipe Castelanelli, Global Head Network Management & market Intelligence Global Transaction Banking at HSBC Bank, say that there are a number of issues that are preventing these assessments from happening immediately.
There is a great difficulty to collate real-time information in order to implement in a risk matrix, says Mackay. There is also a need for a new set of infrastructure on a global perspective and risk matrix to determine decision making process.
However, despite the client need for further risk assessment, as they worry more about their assets going down, rather than the custodian going down, some panellists are keen to point out that even through recent financial crisis, the outcome is not always the end of the world.
For instance, if you look at what happened in Iceland, where major groups defaulted, many banks still settled transactions, says Parker. It is not necessarily the doomsday scenario that the media may detail and we got to realise that we are all guilty of overplaying the situation. We are here to mitigate the risks, but there is only so much a custodian or bank can do.
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(LB)