Risk analysis on Lombard loans (credit/market/liquidity), optimisation with a rehypothecation program and impact of Securities Financing Transactions Regulations ("SFTR")

Abstract

This thesis was written as part of a project thesis carried out within the Risk Department of Banque Havilland. The aim of this project is to achieve a risk analysis on Lombard loans, maximize the benefits of collateral rehypothecation by following the Securities Financing Transactions Regulations (SFTR) and analyse the impact of these transactions. The overall project is divided into five major parts. 1. The risk identification and analysis The first step will be more theoretical and will consist of defining what a Lombard loan is as well as rehypothecation and the regulation attached to it: The Securities Financing Transactions Regulations. The advantages and disadvantages of this technique should be identified. Then, considering that this project took place under the supervision of the risk management department, it is very important to identify all the risks associated with a Lombard loan and the rehypothecation. 2. The determination of the maximum Lombard value After extracting all my data, I was able to calculate the pledged assets value for the bank based on the criteria set up by the credit department. This value is called the maximum Lombard value of the collateral. This point also allowed me to compare the value actually attributed to the collateral by the credit department with the theoretical value I obtained by applying the bank's criteria. 3. Stress test This step was to realise my first stress tests, which consist of simulating different scenarios in order to analyse the impacts of these scenarios on my Lombard loans. 4. Pillar I The purpose of this step is to make an estimate of the Pillar I under Basel III. The objective is to find out how much capital the bank should have in reserve to cover unexpected losses and maintain solvency in the event of a crisis. 5. Collateral upgrade and downgrade transaction This step is to set up our rehypothecation system through collateral downgrade and upgrade transaction. The purpose of this collateral rehypothecation is to use these transactions to enhance the Liquidity Coverage Ratio (LCR).