DescriptionThis handbook shows a firm how to repurpose its risk management in order to design and implement a corporate culture which involves all business units and individuals at each level of the hierarchy, how to analyse its risk appetite, translate it into risk policies and risk targets and distribute responsibilities and capabilities accordingly. The book explains how to identify risk exposure across the enterprise; how to empower each business unit with risk management capabilities; how to create an information workflow for preventative decision making; how to align funding strategies and liquidity management tactics with corporate risk policies and finally, how to deal with risk management in external communications.
1 Introduction: Risk is People's Business.
1.1 The Essence of Capitalism.
1.2 The Move to Models; when Risk Ceased to be Managed.
1.3 The Decade of Risk Management.
1.4 Risk Intelligence Precedes Risk Management.
1.5 Risk Management and the Human Dimension of Capitalism.
1.5.1 Risk scales and balances.
1.5.2 A risk culture is corporate DNA.
PART 1 DISTRIBUTING RISK EXPOSURE AND SENSITIVITY ACROSS THE ENTERPRISE.
2 Identifying Risk Factors.
2.1 Specific Risk Factors.
2.1.1 The search for risk factors.
2.1.2 Root-risk factors.
2.1.3 Identifying valuation risk.
2.1.4 Identifying liquidity risk.
2.2 Systematic Risk Factors.
2.2.1 Portfolios of external risks.
2.2.2 Systematic risk and factors correlation.
3 Working with Risk Factors.
3.1 Approaching Risk Through Sensitivity and Scenarios.
3.2 Root-Risk Factors and Conduits of Sensitivity.
3.3 Back-Testing and Maintaining the Factors.
4 Working with Scenarios.
4.1 Scenario Definition.
4.2 High-Severity and Worst Case Scenarios.
4.3 Aggregating Firm-wide Risk Sensitivity.
4.4 Aggregating Scenarios.
5 From Aggregated Risks to Distributed Risks.
5.1 The Traditional Approach to Risk Management has Led to the Modelling of Exposure by Business Lines.
5.2 Distributing Risk by Risk Factors Leads to Creation of a Culture.
5.3 Distributed Risk Implies Data Analysis.
6 Creating an Adaptive Information Workflow.
6.1 Getting the System to Evolve.
6.2 Moving on to the Next Step.
PART 2 EMPOWERING BUSINESS AND RISK UNITS WITH RISK MANAGEMENT CAPABILITIES.
7 Allocating Risk Management Capabilities.
7.1 Business Managers are Risk Managers.
7.2 The Role of Executive Risk Committees.
7.3 The Role of Audit and Control Units.
8 Mitigation Strategies and Hedging Tactics.
8.1 Front-line Business Units.
8.2 Operational Units.
8.4 Risk Committees and Audit Controls.
9 Risk Independence or Indifference to Risk?
9.1 Role of the Shareholders and Nonexecutive Directors.
9.2 Responsibility and Accountability.
9.3 Control and Report Hierarchy.
10 Risk-Weighted Performance.
10.1 Principles of Risk-weighted Measurements.
10.1.1 Mark to time-weighted volatility.
10.1.2 Business resilience and countercyclical approaches.
PART 3 CREATING AN INFORMATION WORKFLOW FOR CONTINUOUS FEEDBACK AND PREVENTIVE DECISION MAKING.
11 From Risk Appetite to Risk Policies.
11.1 Risk: The New Bond.
11.2 Dynamic Two-way Information Workflow.
11.3 Preventive Rules for a Pre-Emptive Course of Action.
11.4 The Dynamic Assessments of Risk Factor Sensitivities.
11.4.1 Risk factor appropriateness tests.
11.5 Sensitivity Rules and Stress Tests.
11.5.2 Dynamic, swappable mitigation tactics.
12 Bottom-Up Activity Feedback.
12.1 Keeping a Finger on the Pulse.
12.1.1 Continuous efficiency monitoring.
12.1.2 Test and result certification.
12.2 Aggregating Scenarios: The Actual Risk Appetite of the Firm.
12.3 Towards a Risk Information Bus for IT Purposes.
13 Enterprise-Wide Aggregation.
13.1 Cross-asset Sensitivity Aggregation.
13.2 Cross-division Aggregation Potential Pitfalls.
13.2.1 Cross-market effects and correlations.
13.2.2 Of correlation and liquidity.
13.2.3 Model and valuation risks.
13.2.4 Technology risks.
14 Top-Down Decisions and Feedback.
14.1 Risk Dashboards.
14.2 Pre-emptive Decision Frameworks.
14.3 An Interactive and Adaptive Workflow.
14.4 Hierarchy, Decisions, Overruling.
15 Deriving a Firm’s Actual Observed Risk Appetite.
15.1 Modelling Worst Case Scenarios.
15.1.1 Aggregating figures.
15.1.2 Aggregating qualitative assessments.
15.2 Risk Policies Reconciliation.
15.2.1 Quantitative: risk factors, sensitivity, scenarios.
15.2.2 Qualitative: implied assumptions, distributions, correlations, market evolutions, back-testing.
15.2.3 Solvency and liquidity management.
15.2.4 Systematic risks.
15.2.5 Regulatory risks.
PART 4 ALIGNING FUNDING STRATEGIES AND LIQUIDITY MANAGEMENT TACTICS WITH CORPORATE RISK POLICIES.
16 Liquidity, the Ultimate Operational Risk.
16.1 Maintaining the Internal Balance.
16.2 Internal Sources of Liquidity Risks.
16.3 External Sources of Liquidity Risk.
17 Analysing and Measuring Liquidity Risks.
17.1 Valuation-driven Liquidity Risks.
17.2 Market Depth.
17.3 Over-the-counter Markets.
18 Funding Risk.
18.1 Asset Liability Risks.
18.2 Systematic Sources of Liquidity Risks.
18.3 Concentration Risks.
18.3.1 Dynamic concentrations.
18.3.2 Concentration risk measurements.
18.3.3 Counterparty interdependence.
18.3.4 Regulatory-driven liquidity risk.
19 Managing and Mitigating Liquidity Risks.
19.1 Laying Down the Foundations of a Corporate Strategy.
19.1.1 Chosen risk factors and appetite for risk.
19.2 Monitoring Concentrations.
19.3 Working with Risk Concentrations.
19.3.1 Reconciliations or risk concentrations and risk policies.
19.3.2 Managing concentrations.
19.4 ALM Analyses and Liquidity Management.
19.4.1 Margin and business risk analysis.
19.4.2 Sensitivity of duration gaps.
19.4.3 Convexity gaps.
19.5 Valuation Risks.
19.5.1 Market depth.
19.5.2 Counterparty-related liquidity risks.
19.5.3 Corporate governance.
19.6 Regulatory Risk.
19.7 Of Liquidity Risk and Correlation.
19.8 Funding Strategy is a Risk Profile.
PART 5 EXTERNAL COMMUNICATIONS, DISCLOSURE POLICIES AND TRANSPARENCY.
20 External Communications.
20.1 Risk, the New Media.
20.2 Disclosure Policies.
20.2.1 Communications directed at regulators and industry representatives.
20.2.2 Communications directed at shareholders and funding partners.
20.2.3 Communications directed at the public.
20.2.4 Public relations and disclosure policies.
21 Enhancing Transparency.
21.1 Prices and Valuations Transparency.
21.2 Transparency of Internal Processes and Procedures.
21.3 Transparency of Corporate Governance Rules and External Communications.
22 Information Exchange for Risk Intelligence.
22.1 Proposal for a Global Credit and Collateral Exposure Surveillance Scheme.
22.2 Proposal for a Taxonomy of Path-dependent Derivatives and Retail Structured Products.
22.3 Risk Intelligence Ratings.
22.3.1 Valuation risk ratings.
22.3.2 Risk-based pricing frequency.
PART 6 THE REGULATORY UPHEAVAL OF THE 2010s.
23 The Great Unwind.
23.1 Regulatory Reshuffle.
23.1.1 How risks have evolved.
23.1.2 From risk regulation to regulatory risks.
24 Propositions for a Regulatory Upheaval.
24.1 Propositions Relating to Idiosyncratic Risks.
24.1.1 Risk concentration benchmarks.
24.1.2 Departure from the generalized assumption of normality.
24.1.3 Benchmarks of risk exposure and liquidity concentrations.
24.2 Propositions Relating to Systematic Risks.
24.2.1 Required Disclosure of Term Structures of Assets and Liabilities in Foreign Currencies.
24.2.2 Dynamic capital adequacy requirements.
24.2.3 Preserving diversity.
24.3 Propositions Relating to Systemic Risks.
24.3.1 Establish controls for cross-industry transactions and exposure netting.
24.3.2 Simulations involvingmultiple sectors and regulators.