Financial Enterprise Risk Management

by Paul Sweeting

• ISBN13: 9780521111645
• ISBN10: 0521111641
• eBook ISBN(s): 9781139635486
• Format: Hardcover
• Copyright: 2011-10-17
• Publisher: Cambridge University Press

Summary

Financial Enterprise Risk Management provides all the tools needed to build and maintain a comprehensive ERM framework. As well as outlining the construction of such frameworks, it discusses the internal and external contexts within which risk management must be carried out. It also covers a range of qualitative and quantitative techniques that can be used to identify, model and measure risks, and describes a range of risk mitigation strategies. Over 100 diagrams are used to help describe the range of approaches available, and risk management issues are further highlighted by various case studies. A number of proprietary, advisory and mandatory risk management frameworks are also discussed, including Solvency II, Basel III and ISO 31000:2009. This book is an excellent resource for actuarial students studying for examinations, for risk management practitioners and for any academic looking for an up-to-date reference to current techniques.

Table of Contents

Preface	p. xi
An introduction to enterprise risk management	p. 1
Definitions and concepts of risk	p. 1
Why manage risk?	p. 3
Enterprise risk management frameworks	p. 5
Corporate governance	p. 6
Models of risk management	p. 8
The risk management time horizon	p. 9
Further reading	p. 10
Types of financial institution	p. 11
Introduction	p. 11
Banks	p. 11
Insurance companies	p. 14
Pension schemes	p. 16
Foundations and endowments	p. 18
Further reading	p. 18
Stakeholders	p. 20
Introduction	p. 20
Principals	p. 20
Agents	p. 31
Controlling	p. 41
Advisory	p. 48
Incidental	p. 51
Further reading	p. 53
The internal environment	p. 54
Introduction	p. 54
Internal stakeholders	p. 54
Culture	p. 55
Structure	p. 57
Capabilities	p. 60
Further reading	p. 60
The external environment	p. 61
Introduction	p. 61
External stakeholders	p. 61
Political environment	p. 62
Economic environment	p. 62
Social and cultural environment	p. 64
Competitive environment	p. 65
Regulatory environment	p. 66
Professional environment	p. 85
Industry environment	p. 88
Further reading	p. 90
Process overview	p. 91
Definitions of risk	p. 93
Introduction	p. 93
Market and economic risk	p. 93
Interest rate risk	p. 94
Foreign exchange risk	p. 94
Credit risk	p. 95
Liquidity risk	p. 96
Systemic risk	p. 97
Demographic risk	p. 99
Non-life insurance risk	p. 101
Operational risks	p. 102
Residual risks	p. 110
Further reading	p. 111
Risk identification	p. 112
Introduction	p. 112
Risk identification tools	p. 112
Risk identification techniques	p. 115
Assessment of risk nature	p. 119
Risk register	p. 119
Further reading	p. 120
Some useful statistics	p. 121
Location	p. 121
Spread	p. 122
Skew	p. 124
Kurtosis	p. 125
Correlation	p. 126
Further reading	p. 132
Statistical distributions	p. 134
Univariate discrete distributions	p. 134
Univariate continuous distributions	p. 137
Multivariate distributions	p. 171
Copulas	p. 195
Further reading	p. 220
Modelling techniques	p. 221
Introduction	p. 221
Fitting data to a distribution	p. 223
Fitting data to a model	p. 228
Smoothing data	p. 237
Using models to classify data	p. 245
Uncertainty	p. 259
Credibility	p. 262
Model validation	p. 270
Further reading	p. 271
Extreme value theory	p. 272
Introduction	p. 272
The generalised extreme value distribution	p. 272
The generalised Pareto distribution	p. 275
Further reading	p. 279
Modelling time series	p. 280
Introduction	p. 280
Deterministic modelling	p. 280
Stochastic modelling	p. 281
Time series processes	p. 285
Data frequency	p. 305
Discounting	p. 306
Further reading	p. 310
Quantifying particular risks	p. 311
Introduction	p. 311
Market and economic risk	p. 311
Interest rate risk	p. 325
Foreign exchange risk	p. 337
Credit risk	p. 338
Liquidity risk	p. 360
Systemic risks	p. 362
Demographic risk	p. 363
Non-life insurance risk	p. 372
Operational risks	p. 379
Further reading	p. 381
Risk assessment	p. 382
Introduction	p. 382
Risk appetite	p. 383
Upside and downside risk	p. 386
Risk measures	p. 387
Unquantifiable risks	p. 401
Return measures	p. 403
Optimisation	p. 404
Further reading	p. 411
Responses to risk	p. 413
Introduction	p. 413
Market and economic risk	p. 416
Interest rate risk	p. 430
Foreign exchange risk	p. 434
Credit risk	p. 435
Liquidity risk	p. 442
Systemic risk	p. 442
Demographic risk	p. 444
Non-life insurance risk	p. 446
Operational risks	p. 447
Further reading	p. 456
Continuous considerations	p. 457
Introduction	p. 457
Documentation	p. 457
Communication	p. 458
Audit	p. 460
Further reading	p. 461
Economic capital	p. 462
Introduction	p. 462
Definition of economic capital	p. 462
Economic capital models	p. 463
Designing an economic capital model	p. 464
Running an economic capital model	p. 465
Calculating economic capital	p. 466
Economic capital and risk optimisation	p. 467
Capital allocation	p. 469
Further reading	p. 471
Risk frameworks	p. 472
Mandatory risk frameworks	p. 472
Advisory risk frameworks	p. 483
Proprietary risk frameworks	p. 499
Further reading	p. 504
Case studies	p. 505
Introduction	p. 505
The 2007-2011 global financial crisis	p. 505
Barings Bank	p. 511
Equitable Life	p. 514
Korean Air	p. 517
Long Term Capital Management	p. 519
Bernard Madoff	p. 521
Robert Maxwell	p. 522
Space Shuttle Challenger	p. 523
Conclusion	p. 525
Further reading	p. 525
References	p. 527
Index	p. 540
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