XVA Desks — A New Era for Risk Management: Understanding, by Ignacio Ruiz (auth.)

By Ignacio Ruiz (auth.)

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Extra info for XVA Desks — A New Era for Risk Management: Understanding, Building and Managing Counterparty, Funding and Capital Risk

Example text

In my early days in finance, I was told once by one of my teachers: “The London money market is the most liquid in the world, it has functioned effectively for centuries, without interruption. It will never stop”. In 2008 that market froze. Again, we have learnt the lesson that the liquidity of any market can dry out; we must be ready for that event, however unlikely it may seem. Another illusion we lived with in the early days of derivatives is that they have one unique price, and that if any derivative price diverges from it someone can make “free” money out of it.

And hence economic development would be strongly dampened. 8 XVA Desks – A New Era for Risk Management First of all, this is because banks facilitate a market where different ways of saving and borrowing can be accessed by individuals and companies: one individual wants to lend money for one year, another one for ten years, some want to borrow for a house, some for a TV. Banks puts them all together in an efficient way. Secondly, banks absorb credit risk. If the bank is managed properly, a person or a collection of people defaulting on debt payments does not endanger the depositor and saver’s money.

An economy is as robust as its banking system is, and vice versa; they feed each other. Because of this, risk management is everything to banks and to the economies they operate in. Banks are “hubs” of risk, they are institutions that absorb and distribute it. As such, they are as good to an economy, to a society, and to their shareholders as their risk management processes and systems are. No more and no less. The Banking Industry, Derivatives and XVA 11 Risk management is at the heart of the business of finance.

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