A comprehensive and practical collection of tools and frameworks for risk governance at banks, insurance firms, asset managers, and other financial organizations
In Risk Framework Design in Practice: Getting Risk Governance and Limits Right for Financial Institutions, veteran portfolio and risk manager, Michelle Beck, delivers a robust and functional approach to risk governance that’s perfect for financial institution managers and executives. Beck skips the high-level bromides, avoids narrowly considering only one type of asset class or financial institution, and instead offers practical guidance for leaders across the full scope of the industry seeking to answer critical risk management questions:
What types of risk limits are necessary? How many of them does my organization need? How should they be set? Are minimum regulatory standards sufficient to safeguard my company’s interests?
Risk Framework Design in Practice provides an effective structure for enterprise risk limits in different types of firms, including banks, asset managers, insurers, and corporate pensions. It explains how these types of firms should establish risk appetites, the essential pieces of their governance structures, and how to ensure the right information is in the right hands at the right times. It also includes:
- Deep dives into the relevant limits for market, credit, and operational risks, including the implications of using alternative methods
- Detailed discussions of contemporary approaches to limiting economic capital, value at risk, stress tests, exposures, liquidity, concentrations, stop-losses, and drawdown limits
- Approaches to operational risk that avoid the expensive trap of attempting to police business efficiency, and instead focus on control strength for truly dangerous risks
Risk Framework Design in Practice is an effective resource for chief risk officers and professionals working in enterprise risk departments at banks, broker dealers, insurance companies, asset managers, and hedge funds. Also perfect for board members at banks and insurance companies, in-house counsel at financial firms, and bank and securities regulators.
Table of Contents:
Foreword xi
A Note On Language In This Book xx
About the Author xxiii
Chapter One Overview of Enterprise Risk Frameworks 1
Purpose and Philosophy of Risk Limits 3
Setting a Total Risk Limit at the Top of the Enterprise: Interaction with Return on Equity, Cost of Equity, and Other Corporate Objectives 14
Lessons from Risk Governance Gone Wrong 18
What Does Effective Challenge Look Like? 31
Profitable Strategies and Event Risk 33
Distinctions Between Risk Controls and Financial Controls 35
Differences and Establishing Limits/Tolerances by Type of Financial Institution 40
Where Is Governance Needed? 48
Exercises for Chapter One 53
Answer Key 54
Chapter Two Risks of Degree: An Overview 55
Market Risks for Public Markets 57
Exercises for Chapter Two 72
Answer Key 72
Chapter Three Risks of Degree: the “big Six” for Market Risk, Part I 73
Notional and Principal Limits 74
Exposure Limits 89
Value at Risk 151
Exercises for Chapter Three 188
Answer Key 190
Chapter Four Risks of Degree: the “big Six” for Market Risk, Part II 191
Stress Tests and Scenario Analysis 191
Liquidity: Concentration and Market Participation Limits 199
Stop- Loss and Drawdown Limits 241
Summary of Chapters Three and Four: How the “Big Six” Work Together to Maximize Strengths and Minimize Weaknesses 244
Exercises for Chapter Four 248
Answer Key 249
Chapter Five Risks of Degree: Credit Exposure and Potential Loss Limits 251
Limiting Commitments 252
Credit Default and Ratings Change Risk Limits 258
Interplay of Market Risk and Counterparty Credit 263
Collateral Considerations 272
Credit Default Derivatives as a Hedge 273
Exercises for Chapter Five 275
Answer Key 276
Chapter Six Binary Risks 277
Understanding Binary, One- Tailed Risks 280
Operational Risk Program Design 285
Key Risk Indicators 297
Specialized Operational Risk Programs 298
Compliance Program Design 302
Exercises for Chapter Six 314
Answer Key 315
Chapter Seven Model Risk Controls 317
How and Why Did Model Risk Controls Develop? 317
How Do We Define a “Financial Model?” 319
What Makes a Model High- Risk? 321
What Controls Can Be Applied to Manage Financial Model Risk? 339
Additional Words for the Wise 362
Exercises for Chapter Seven 366
Answer Key 368
Chapter Eight Risk Governance for Private Assets 369
Risk Management Frameworks for Stand- Alone Private Asset Investment Funds 372
Incorporating Private Assets into Multiasset Portfolios 380
Exercises for Chapter Eight 386
Answer Key 387
Notes 389
Index 401
About the Author :
MICHELLE McCARTHY BECK has nearly 40 years of experience as a derivative portfolio manager, risk manager, and chief risk officer in large banking, asset management, and insurance companies in the U.S. and Europe. Most recently, she served as a risk management expert at the U.S. Securities and Exchange Commission.
