Management

Risk Management

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Risk Management introduces, illustrates, and analyzes the many aspects of modern risk management
in both financial institutions and nonbank corporations. It consolidates the entire field of risk
management from policies to methodologies as well as data and technological infrastructure. It also
covers investment, hedging, and management strategies.
The shift to flexible exchange rates in the late 1960s has led to more volatility in exchange rates. As
volatility increased, financial markets began to offer a new breed of securities, that is, derivatives
such as futures and options, to allow institutions to hedge their exposures to currency fluctuations.
The increase in inflation in the early 1970s and the advent of floating exchange rates soon began to
generate interest rate instability. Again, the market responded by offering new derivative products to
hedge and manage these new risks. Banks found themselves increasingly engaged in risk
intermediation and less in traditional maturity intermediation. Banks also started to innovate and offer
new customized derivative instruments, known as over-the-counter (OTC) products, that both
compete with and complement traded derivatives.
In 1988 the Bank for International Settlements (BIS) set the capital adequacy requirements for
banking worldwide to account for credit risk. This was the first international effort to deal with the
growing exposure of financial institutions to risk and volatilities, and especially to risk of off-balance
sheet claims such as derivative instruments. The 1988 BIS Accord was followed by the 1998 BIS
Accord, accounting for market risks in the trading book, as well as by many documents of the BIS
discussing the many facets of risk management. The SEC implemented its risk exposure disclosure
requirements in 1998 for all exchange traded companies in the United States.
Risk management is not an American phenomenon. Today it covers all continents and all countries.
What we observe today is a convergence of regulation and disclosure requirements across the globe. More than in any other field, the tools and reporting requirements of risk management are
universal.
This book is based on our academic as well as practical work in the field of risk management. We try
to cover both institutional aspects and organizational issues, while not forgetting that risk
management is based on statistical and financial models.
The book is a comprehensive treatment of all aspects of risk management. It starts by discussing the
new regulatory framework that is shaping best practice risk management in the banking industry
worldwide. The risk management techniques that have been developed by and for banks are now
migrating to the corporate sector. There is mounting pressure from regulators, such as the SEC in the
United States, financial analysts, and investors for more and better disclosures of financial risks and
the techniques and instruments being adopted to control these risks.
The book provides a consistent and comprehensive coverage of all aspects of risk management—
organizational structure, methodologies, policies, and infrastructure—for both financial and
nonfinancial institutions. It offers an up-to-date exposition of risk measurement techniques for
market, credit risk, and operational risk. The risk measurement techniques discussed in the book are
based on the latest research. They are presented, however, with considerations based on practical
experience with the daily application of these new risk measurement tools. The book also elaborates
on the issues that the next generation of risk measurement models will have to address, such as the
full integration in a consistent multiperiod framework of liquidity, market, and credit risk; the
measurement of risk for illiquid positions, as for example the merchant banking book; the risk
assessment over a long-term horizon of structural positions, such as the "gap" of the corporate
treasury in a financial institution; and stress testing to assess risk in periods of financial crises.
The book relies heavily on the experience of the authors in developing the risk management function
in a bank from the ground up. It goes beyond the technical aspects of risk measurement. It proposes
an integrated framework for managing risks and an organizational structure that has proven
successful in practice.
We have incorporated the latest evolution of the regulatory framework and the current BIS proposal
to reform the capital Accord. The book offers a unique presentation of the latest credit risk management techniques. It
provides clear guidance to implement a risk management group in a financial institution. It also
discusses how to adapt to a nonfinancial corporation the risk management techniques that have been
originally developed and implemented in banks. The book provides one-stop shopping for knowledge
in risk management ranging from current regulatory issues, data, technological infrastructure, hedging
techniques, and organizational structure.

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English

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NONE

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