On March 31, 2022, Acting Comptroller of the Currency Michael J. Hsu spoke at the American Bankers Association Risk 2022 Conference. In his speech, Hsu discussed how Russia's invasion of Ukraine has affected tail risks as well as tail risks associated with the trading of crypto-related derivatives.
Hsu started by describing how “tail risks” or low probability, high impact risk events have become embedded in the business-as-usual risk management toolkit such as geopolitical risk, cyber risk, inflation and rate risk, asset price risk, and recession risk, etc. Hsu noted that Russia’s invasion of Ukraine has affected tail risks, as well as geopolitics. He stated that the most direct impact of the invasion is the heightened geopolitical risk of broader conflict in Europe which could have significant effects on regional economies and financial markets. He also added that the invasion has directly heightened both cyber risk and inflation risk. He encouraged financial institutions, particularly the risk managers and bank executives, to pay extra attention to these risks and act accordingly.
Hsu also took the opportunity to speak about tail risks associated with the trading of crypto-related derivatives. He explained that while the Basel Committee on Banking Supervision is evaluating the capital treatment for crypto-related exposures, several large banks are already exploring making markets for clients in bitcoin futures. Hsu, however, warned banks that they should carefully consider the tail risks of trading crypto derivatives, such as:
limited or unreliable price histories;
certain crypto positions being netted in the risk aggregation process for risk reporting, regulatory capital, and risk management proposal; and
the potential for wrong-way risk.
Hsu’s full remarks can be found here.