Managing Extreme Financial Risk
Strategies and Tactics for Going Concerns
- 1st Edition - September 25, 2013
- Author: Karamjeet Paul
- Language: English
- Paperback ISBN:9 7 8 - 0 - 1 2 - 4 1 7 2 2 1 - 0
- eBook ISBN:9 7 8 - 0 - 1 2 - 4 1 7 2 2 2 - 7
Managing Extreme Financial Risk addresses the need for better management strategies in light of increased market risk and volatility in financial institutions' revenue models.… Read more
Managing Extreme Financial Risk addresses the need for better management strategies in light of increased market risk and volatility in financial institutions' revenue models. Top officials from the financial and regulatory industries point to real corporate issues, showing how institutions react to financial crises. From first-hand experiences, they explain how effective sustainability management does not just prevent being blindsided; it also leads to proactive solutions that enhance an institution's strength to weather a sudden financial crisis, add significant shareholder value, and reduce systemic risk. Readable, coherent, and logical, Managing Extreme Financial Risk shows how extreme risk needs to be handled when the cost of being wrong means the difference between life and death of the institution.
- Based on the firsthand experiences and perspectives of senior-level executives
- Concentrates on extreme risk, when the cost of being wrong is not the loss of profits, but the death of the institution
- Written to be easily understood without algorithms, models, and quants
Executives, board members, and regulators as well as undergraduate and graduate students working in all subdisciplines of finance, especially risk management and financial institution management
Section 1: The Need for a New Approach to Tail-Risk Management
Chapter 1. Sustainability Management is Critical
Abstract
1.1 Disciplined Emphasis on Protection from Extreme Operational Risk
1.2 No Similar Emphasis on Protection from Extreme Financial Risk
1.3 Absence of Objective Parameters Accounts for the Lack of Proactive Emphasis
1.4 Do Regulatory Requirements Address Effective Management of Tail Risk?
1.5 Stress Testing
1.6 Living-Will Provision
1.7 Liquidity Reserves
1.8 Going-Concern Management and Tail Risk
1.9 Is the Need For Tail-Risk Management New?
Chapter 2. Tail Risk is the Culprit: Tail Wagging the Dog?
Abstract
Prologue
2.1 Credit Policy: A Watchdog Function without Any Glamor
2.2 Credit Policy Role at Continental Bank
2.3 Evolution of Revenue Models and the Watchdog Function
2.4 Could the Problems of 2008 Have Been Avoided?
Epilogue
References
Chapter 3. Need for a Distinct Focus on Tail Risk: In No Uncertain Terms
Abstract
3.1 Why a Distinct Approach?
3.2 Effective Management Calls for a Distinct Focus on Sustainability Issues
3.3 Sustainability Management Needs Distinct Parameters
3.4 Three Distinct Legs of Risk Governance
3.5 Is the Sole Focus on Risk Management Prudent?
Chapter 4. Sole Focus On Traditional Risk Management Can Be Dangerous: Days of Future Passed
Abstract
4.1 A Mature Industry
4.2 A New Driver of Revenues
4.3 Days of Future Passed
4.4 And Then a Blind-Side Blow
4.5 A False Sense of Security
4.6 Misplaced Use of Models
4.7 Missing Focus on Tail Risk
4.8 Regulatory Emphasis Encouraged Improper Use
4.9 Sole Focus on Traditional Risk Management—Driven By Statistical Models—Can Be Misleading
References
Chapter 5. Usefulness and Limits of Quant Models
Abstract
5.1 Chaos Theory Given Assumption of Normality
5.2 Chaos Theory Given Assumption of Extreme Crisis
References
Section 2: Elements of Sustainaliblity Management
Chapter 6. If you Can’t Measure it, You Can’t Manage it: Taming Something That’s Lurking Around
Abstract
6.1 Prerequisite to an Effective Management Process
6.2 An Example
6.3 You Can Manage Exposure from Tail Risk Only if you can Measure it
Chapter 7. Simplicity to Counter Complexities of Revenue Models
Abstract
7.1 Decision Making Enhanced by Advances in Technology
7.2 Despite Technology and Quant Advances Human Decision Making Remains Simple
7.3 Decisions Regarding Unquantifiable Uncertainty Require A Different Approach
7.4 The Need for Simplicity is Critical In Complex Models
7.5 Post-2008 Developments Have Increased Complexity
7.6 A Simple Measure is Needed as Responding to Complexity with Complexity is a Recipe for Disaster
References
Chapter 8. A New Measure for Effective Sustainability Management: Probable Maximum Loss
Abstract
8.1 A Simple Measure to Gauge the Sustainability of a Complex Model
8.2 PML, As a Measure of Exposure from Extreme Tail Risk, Has Several Advantages
8.3 PML Provides a Solid Tool for the Effective Management of Tail Risk
Chapter 9. Continuous Readiness is Critical: A senior executive who wishes to remain anonymous
Abstract
9.1 Plans Are Useless, Planning is Indispensable
9.2 Readiness Defined
9.3 Degrees of Readiness
9.4 Ready Intellectually and Emotionally
9.5 Ready Intellectually, but Not Emotionally
9.6 Ready Neither Intellectually, Nor …
References
Section 3: Implementation Issues and the Wide-Reaching Impact on Institutions and the Financial System
Chapter 10. Effective Sustainability Management: From Top to Bottom
Abstract
10.1 Key Parameters to Drive Risk Governance
10.2 PML as a Measure of the Extreme Exposure Parameter
10.3 Effective Tail-Risk or Sustainability Management
10.4 Effective Sustainability Management to Protect Capital
Chapter 11. Paradoxical Capital Problem
Abstract
11.1 The Need for a Bigger Cushion is Real Because of the Increased Pressure on Capital
11.2 Increased Capital Solutions are Not Sustainable
11.3 Increased Capital Solutions are Not Realistic
11.4 A New Approach to Addressing the Need for a Bigger Cushion is Required
11.5 Sustainability Management Offers a New Solution by Alleviating the Pressure on Capital
11.6 Another Reason for a New Approach
11.7 A Change is Needed in How Capital is Deployed
References
Chapter 12. Capital as the Last Defense vs the First Defense
Abstract
12.1 More and Stronger Defenses Mean Less Pressure on Capital
12.2 Sustainability-Enhancement Programs
Chapter 13. Tail Risk, Regulatory Supervision, and Systemic Risk: Missing Links
Abstract
13.1 Regulatory Objectives
13.2 Institutional Response
13.3 Reconciling Objectives
References
Chapter 14. Convergence of Regulatory Objectives and Institutional Interests: Alignment of Goals to Enhance Sustainability and Reduce Systemic Risk
Abstract
14.1 Apparent Conflict
14.2 The Challenge
14.3 Convergence towards Common Goals
14.4 Reduction of Systemic Risk
Chapter 15. Telling Your Story Effectively to Alleviate Marketplace Anxiety
Abstract
15.1 High Level of Anxiety
15.2 A New Approach to Communicating Tail Risk Is Needed
15.3 Reducing Anxiety, Building Greater Confidence, and Adding Shareholder Value
15.4 Objective Public Policy Debate
15.5 Too Complex to Manage?
Chapter 16. Critical Factors in Preparing for an Extreme Financial Crisis: A former senior executive who wishes to remain anonymous
Abstract
16.1 AIG Timeline
16.2 Key Observations
16.3 Sound Human Judgment, Not Rocket Science
16.4 Readiness at the Senior-Most Level
16.5 Simplicity to Counter Complexities and Maintain Control
16.6 Conclusions
Chapter 17. From the Bane of the Revenue Model to a Competitive Advantage
Abstract
17.1 The Bane of a Financial Institution’s Revenue Model
17.2 Urgent Need for Proactive Tail-Risk or Sustainability Management
17.3 Proactive Tail-Risk Management Enhances the Ability to Respond to Crises
17.4 Effective Sustainability Management Leads to Many Significant Advantages
Chapter 18. Adapting Organizations to Effective Sustainability Management
Abstract
18.1 Organization Focus
18.2 Implementation
18.3 Conclusion
Epilogue
Appendix. The Wall Street Journal
The Fed’s Stress Tests Add Risk to the Financial System
- Edition: 1
- Published: September 25, 2013
- Language: English
KP
Karamjeet Paul
Karamjeet Paul has over 30 years of operating, finance, treasury, and exposure managment experience, giving him unique expertise in identifying and addressing critical risk-exposure-reward and other strategic issues at the highest levels in large organizations. Mr. Paul's perspective has been gleaned from hands-on experience in large global organizations, startups in entrepreneurial settings, and consulting assignments.
Affiliations and expertise
Founder, Strategic Exposure GroupRead Managing Extreme Financial Risk on ScienceDirect