The banking industry is finding sophisticated risk calculations increasingly hard to resist.
The adoption of new risk measures may be driven by regulation, such as the bilateral initial margin rules or requirements to report credit valuation adjustment (CVA) on P&L, or a desire to optimize pricing and profitability, as with valuation adjustments (XVAs) more broadly.
Whatever the reason, complex risk metrics are nothing new for the world’s biggest financial institutions. But their use is spreading through the tiers. Over the past decade, many tier two banks have increased the sophistication of their calculations in line with larger competitors – and now the pressure is on the remaining tier two and tier three banks to do the same.
To handle intricate quantitative calculations and set margins or prices in the same sophisticated way as tier one institutions, you need access to the right calculation systems and resources. The question is: Can you afford them?