The Doom Loop in the Financial Sector

by Leiss, William

• ISBN13: 9780776607382
• ISBN10: 0776607383
• Format: Paperback
• Copyright: 2010-10-30
• Publisher: Univ of Ottawa Pr

Summary

In the past year, the world has experienced how unsound economic practices can disrupt global economic and social order. Today's volatile global financial situation highlights the importance of managing risk and the consequences of poor decision making. Systemic Financial Riskreveals an underlying paradox of risk management: the better we become at assessing risks, the more we feel comfortable taking them. Using the current financial crisis as a case study, renowned risk expert William Leiss engages with the new concept of "systemic risk" risk so great that recovery from its negative consequences may prove impossible. His risk-centred analysis of the lead-up to the crisis reveals the practices that brought it about and how it became common practice to use limited risk assessments as a justification to gamble huge sums of money on unsound economic policies. In order to limit future catastrophes, Leiss recommends international cooperation to manage systemic risks. He believes that, failing this, humanity could be susceptible to a dangerous nexus of global disasters that would threaten human civilization as we know it.

Author Biography

William Leiss is a fellow and past president (1999-2001) of the Royal Society of Canada and an officer in the Order of Canada. He currently works at the McLaughlin Centre for Population Health Risk Assessment at the University of Ottawa. Over a period of twenty-five years he has worked extensively in a consulting capacity with industry and with Canadian federal and provincial government departments in the area of risk communication risk management and public consultation. He is author, collaborator or editor of fifteen books and numerous articles and reports.

Table of Contents

Preface	p. ix
Acknowledgements	p. xvi
Black Holes of Risk	p. 1
Systemic Risk	p. 2
Super-Systemic Risk	p. 4
Testing the First Atomic Bomb	p. 7
A Coronal Mass Ejection	p. 10
A Smaller Asteroid	p. 14
The Convoluted Tale of the Particle Colliders	p. 15
A Reasonable Selection of Plausible Black-Hole Risks	p. 19
Systemic and Super-Systemic Risk in the Financial Sector	p. 21
Introduction	p. 21
Systemic and Super-Systemic Risk in the Global Financial Sector	p. 28
A Brief Primer on Financial Derivatives	p. 36
Prelude to Global Financial Crisis	p. 38
Types of Financial Risks	p. 44
The Regulatory Response to Systemic Financial Risk	p. 46
A Vapid Risk Management Paradigm	p. 54
The "Standard Model" for Risk Management	p. 58
Dispersal of Risk	p. 61
Correlation	p. 71
Contagion	p. 75
Complexity	p. 80
Tight Coupling	p. 84
Heterogeneity and Modularity	p. 86
The "Value at Risk" Model	p. 90
Solutions	p. 93
General Conclusions	p. 99
Controlling the Downside Risk	p. 108
Three Simple Steps for Good Risk Management	p. 108
Applying Precaution to Black-Hole Risks	p. 119
Black-Hole Risk in the Global Financial Sector	p. 124
Risk of a Coronal Mass Ejection	p. 127
Risk from a Smaller Asteroid	p. 128
Risk of Cyber-Warfare	p. 129
Risk of Nuclear Proliferation	p. 130
Risk of Climate Change	p. 132
Conclusion: The Ugly Reality of Non-Linearities	p. 135
Fragility in Complex Systems and the "Tipping Point" Problem	p. 137
A Basic Integrated Risk Management Framework Table 2-1, Dimensions of Risk Management	p. 146
Works Cited	p. 148
Index	p. 158
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