Winning at Risk : Strategies to Go Beyond Basel

by Cortez, Annetta

• ISBN13: 9780470924662
• ISBN10: 0470924667
• Format: Hardcover
• Copyright: 2011-06-07
• Publisher: Wiley

Summary

Practical risk and capital management strategies for financial service executives and high level managersRisk and Capital Management is a primer for senior executives and directors struggling to interpret the growing demands and implications in this field. It includes valuable perspectives on how to address key issues that are pressing in the boardroom. It is the first book to lay out the basic frameworks of risk management, how to navigate new regulation, how to build a sound risk management capability, and how to translate that capability into strategic success. A must-have management aid and reference tool for the financial services professional Expert coverage of measuring risk, managing risk, integrating risk management into business, and leveraging business excellence through risk Written by a respected thought leader in risk managementProviding CEOs and financial executives with the basic building blocks and concepts of risk management, this essential book simplifies risk management requirements for board and executive level professionals.

Author Biography

Annetta Cortez is an international expert in risk management and capital management at Novantas LLC, the leading provider of management consultancy and information services to the financial services industries. Before joining Novantas, she led her own firm, ACT Consulting, in advising many of the major banks in Australia, Asia, the United Kingdom and the United States. Formerly a principal at Oliver Wyman Group, Cortez also played a leadership role at the KPMG Barents Group, where she initially led the international practice for risk and performance management, and later led the Asia-Pacific practices in enterprise solutions and financial institutions. She is the author of The Complete Idiot's Guide to Risk Management.

Table of Contents

Foreword	p. xi
Preface	p. xiii
Acknowledgments	p. xvii
Introduction	p. 1
Searching for a Solution	p. 1
Why Manage Risk?	p. 2
Why is Risk Management Difficult to Implement?	p. 7
What is Risk?	p. 11
The Business of Risk	p. 11
Defining Risk: Loss, Uncertainty, and Horizon	p. 12
More Ways to Think about Risk	p. 14
Taxonomy of Risks	p. 15
Risk and Reward: Modern Portfolio Theory	p. 19
Risk Management Principles	p. 22
Words to Live by	p. 22
Know Your Risks	p. 23
Articulate Your Risk Appetite	p. 25
Develop a Well-Defined Risk Culture	p. 27
Use a Common Language	p. 29
Develop Capabilities and Approaches in Line with the Size, Complexity, and Culture of Your Organization	p. 30
Make It Transparent and Comprehensive	p. 31
Construct Clear Limits and Controls	p. 32
Align Performance and Incentives to Risk and Reward	p. 33
Develop Comprehensive Forecasting, Stress Testing, and Challenge Processes	p. 34
Provide Active Leadership and Direction	p. 35
Construct Strong Governance and Oversight	p. 37
Make Continuous Improvements	p. 39
Building the Risk-Management Framework	p. 40
All the Right Elements	p. 40
Your Risk Management Organization	p. 44
Your Risk Culture	p. 48
Your Governance Model	p. 52
Your Policies and Processes	p. 55
Your Data and Systems	p. 58
Measuring Risk and Capital	p. 64
Why Measure Risk?	p. 64
Laying Out the Fundamentals, from the Top Down	p. 65
Probability, Exposure, and Severity	p. 67
Probability Distributions	p. 69
Expected Loss	p. 72
Unexpected Loss and Value at Risk	p. 74
Economic Capital	p. 76
The Role of Data and Assumptions	p. 79
Managing across the Economic Cycle	p. 81
Stress Testing	p. 83
Validation of Models	p. 84
Modeling Credit Risk	p. 87
Modeling Market Risk	p. 94
Modeling Operational Risk	p. 100
Jump Diffusion and Extreme Value Theory	p. 103
Managing Trade-Offs Between Risk and Reward	p. 105
The CEO Challenge	p. 105
Performance Measures-The Basics	p. 108
Performance Measures-Multi-Period Calculations	p. 112
Capital Attribution and Allocation	p. 115
Applying Performance Measures	p. 119
Top-Down versus Bottom-Up	p. 125
Understanding Your Appetite for Risk	p. 126
Identifying the Risk Appetite	p. 126
Risk Appetite and ICAAP	p. 128
Building the Risk Appetite Statement	p. 129
Managing the Risk Appetite (Process)	p. 135
Governance and Risk Appetite	p. 138
The Living Will	p. 138
Integrating Risk Management into Your Organization	p. 141
Embedding Risk Management	p. 141
What is Enterprise Risk Management?	p. 142
Culture	p. 144
Incentives and Compensation	p. 147
Your Organization	p. 149
Lines of Defense	p. 152
Reporting, Monitoring, and Decision-Making	p. 156
Leveraging your Business Rhythm	p. 159
ERM and COSO	p. 162
Leveraging Risk for Business Excellence	p. 164
More than Compliance	p. 164
Introducing the Customer Lifecycle	p. 166
Leveraging the Upside	p. 167
Managing the Downside	p. 179
Optimization	p. 182
Basel II and Beyond	p. 191
Basel II: What's It All About?	p. 191
The Regulator Viewpoint	p. 195
Basel II Basics	p. 200
Special Challenges and Requirements	p. 214
Is It Worth It?	p. 219
Key Differences from Economic Approaches	p. 222
Beyond Basel II: Basel III and Regulatory Reform	p. 223
Solvency II	p. 228
Impacts on Financial Institutions and Financial Markets	p. 231
Non-Bank Financial Institutions	p. 232
Too Big to Fail	p. 232
Afterword	p. 235
About the Author	p. 238
Index	p. 239
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