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Suresh recently assumed the role of Chief Risk Officer and Managing Director, Advisory Services, of Kamakura Corporation where he heads, develops, and provides Enterprise Risk Management (ERM) and Basel III software and advisory consulting services to its clients worldwide.

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 Suresh Sankaran's Blog

Donald R. van Deventer and Suresh Sankaran
April 25, 2016

The International Financial Reporting Standard (“IFRS”) 9 and the Financial Accounting Standard Board’s (“FASB”) Current Expected Credit Loss (“CECL”) model significantly raise the accuracy bar for valuation and credit risk analytics for all organizations who report under their aegis.

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Sahaviriya Steel, founded in 1990, is not new to defaults. The group was among Thailand's biggest bad debtors during the Asian financial crisis almost two decades ago, and in 1999 recovered from insolvency as part of a 21-billion-baht debt restructuring programme. Siam Commercial Bank was one of the lead lenders at that time.

The company came to control the Teesside steel plant after purchasing it from India's Tata Steel Ltd in 2011. Even at that time, the plant was losing money. The Viriyaprapaikit family's other companies have included property developer Sahaviriya City Plc and a predecessor company to computer distributor SVOA Plc. Both defaulted on their debt during the Asian financial crisis.

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For long, it was suspected that without access to INTEX or TREPP, it would be next to impossible to model securitized assets. It has been argued that these assets are fungible and therefore not easy to model on a transaction basis in any risk management solution, and the standard modelling techniques outlined take into consideration the links that INTEX or TREPP offer on cashflow pools and waterfalls. The conventional modeling approach to the valuation of securitized assets has taken on a simplistic hue, in that a link to a provider of standard asset-backed security information is enough to provide a valuation framework that would be largely accepted, but this comes at a distinct cost:

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Traditionally, liquidity has been defined as:

  • A Russian problem;
  • An Asian problem;
  • Someone else’s problem;
  • A broker’s problem;
  • Not something to worry about since it is guaranteed by the Central Bank; or,
  • All of the above.

Even the Bard has commented on liquidity with the rather pithy ‘put money in thy purse’!

The fact is that most of us are in agreement that liquidity is an important risk element but it is also indisputable that we probably spend less time thinking about it than any other risk category. From an enterprise wide risk management point of view, the need for the integration of liquidity, market and credit risk was recognised after the Russian crisis (August 1998) and the “flight to quality" that followed.

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Liquidity risk led an unremarkable existence up until 2007-8, when suddenly, regulatory hell broke loose on it. From being a risk that no one talked about, it became the most regulated over a period of 4-5 years. What changed?

Every financial institution collapse added to the mystique of liquidity risk; experts opined, ‘alas, that organisation did not have adequate liquidity to foot expenses’, and this added to the furore surrounding the lack of regulation around liquidity risk.

A risk that was measured through prosaic ratios like loans to deposits is now being subject to haircuts, 3-notch downgrades, run on deposits, concentration of funding and so on. How did this come about?

The answer to both questions lies in the fact that there is now a belated acceptance to the fact that the end product of every other risk in the marketplace in financial terms is a lack of liquidity.

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