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Better risk management and risk measurement are essential for banks' success, and helped limit loan losses in the 2001 recession. Better risk management may be the only truly necessary element of success in banking, according to US Federal Reserve Chairman Alan Greenspan
Mr Greenspan said that banks have not become solely underwriters of loans and debt because taking some credit risk 'remains profitable for those who know how to manage it effectively'. Two key elements of managing credit risk, Mr Greenspan said, are quantification and the ability to hedge through derivative securities.
It has also generated a market in credit swaps and other derivative securities that have allowed banks to transfer some lending risk into hedge funds, insurance concerns, and other institutions that may have 'larger equity coverage' to handle potential losses. Derivatives are financial obligations whose value is derived from underlying assets such as debt and equity securities, commodities or currencies.
JPMorgan Chase & Co and other US banks increased their derivatives holdings 5.6 per cent to a record US$81 trillion in the second quarter as corporations sought to hedge against rising interest rates.
The value of derivatives held by banks rose from US$76.5 trillion in the first quarter, the US Office of the Comptroller of the Currency said last month. JPMorgan, the second biggest US bank, had the most derivatives at the end of June, with US$41.6 billion.
.... US Banks are strong
.... Zimbabwe banks are weak
.... Asian Development Outlook 2004
.... IMF on Indian government deficit
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