Financial Markets, Risk Management & Fintech Assorted Links

Navigating the complex landscape of risk management and financial markets requires a nuanced understanding of evolving practices and emerging trends. This week, I’ve curated a selection of insightful articles that explore key topics, from innovative equity valuation models to practical guidelines for managing counterparty credit risk. Whether you're delving into the implications of regulatory changes in FinTech or seeking actionable strategies for effective risk analysis, these resources provide valuable perspectives to deepen your expertise.

1. Beyond the Fed Model: Dissecting Equity Valuation Trends (Enterprising Investor).
2. How to make risk analysis an effective guide to managing risk (LSE Business Review).
3. Guidelines for counterparty credit risk management. The Basel Committee on Banking Supervision has issued guidelines for banks' counterparty credit risk (CCR) management. The guidelines include key practices critical to resolving long-standing industry weaknesses in CCR management, including the need to: (i) conduct comprehensive due diligence at both initial onboarding, as well as on an ongoing basis; (ii) develop a comprehensive credit risk mitigation strategy to effectively manage counterparty exposures; (iii) measure, control and limit CCR using a wide variety of complementary metrics; and (iv) build a strong CCR governance framework (BIS).
4. Finally, The use and disuse of FinTech credit: When buy-now-pay-later meets credit reporting. How does information sharing affect consumers' usage of FinTech credit? Using a unique dataset of "Buy Now, Pay Later (BNPL)" users from a large digital platform and exploiting a credit reporting policy change, we document that consumers significantly reduce BNPL usage when the BNPL lender becomes subject to credit reporting regulation. This reduction is particularly pronounced among borrowers with default histories, who also show improved repayment behaviors compared to those without such records. The decrease in BNPL usage also leads to a reduction in online consumption, supporting the financial constraint hypothesis. Our findings indicate that information sharing can help mitigate overborrowing and overspending, with stronger effects seen among younger borrowers, those who previously spent more, or those with credit cards. We also highlight the synergies between BNPL lending and Big Tech platforms' ecosystems, which imperfectly substitute for formal enforcement institutions (BIS).

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Stay tune!