Risk Management and Capital Adequacy

Thisbookpresentsastep-by-stepapproachforintegratingmarket,credit,andoperationalriskmanagement.WhilecomplyingwithNewBaselAccordGuidelinesforfinancialinstitutionsaroundtheworld,theworkinvolvedinmanagingmarket,credit,andoperationalriskexposures-aswellasthecapitalrequiredtosupportsuchexposures-willchangedramaticallyunderthenewBaselAccordguidelines."RiskManagementandCapitalAdequacy"isthefirstbooktoexaminehowinstitutionscanstreamlineprogramsby,whereverpossible,integratingandsimplifyingriskmanagementstrategiesandtechniques.Fromanalysesofthelatestmodelsandframeworkstocasestudiesandexamplesofthedevastatingeffectsofunfocusedorinsufficientriskmanagement,thisin-depthexaminationreveals:buildingblocksforconstructinganintegrated,effectiveriskmanagementframework;thethreepillarsoftheBaselAccord-andwhatinstitutionsmustdotocomplywitheach;anddetailsbehindfinancialdisasters,fromLTCMtoBarings,andhowtheycouldhavebeenprevented.Whilebankshaveaninstitutionalinterestinmanagingriskexposures,theyalsohaveacompetitiveinterestinminimizingthecapitalrequiredtooffsetthoseexposures."RiskManagementandCapitalAdequacy"isthefirstbooktooutlineanintegrativeframeworkformanagingrisks,andcomplyingwiththeBaselAccordrequirements,inthemostcost-effective,capital-efficient,andcompetitivelysoundpossibleways.Theeffectivemanagementofriskisafront-and-centertopicforfinancialinstitutions.ChargedwithmeetingeverythingfromthenewlyfluidrealitiesofglobalmarketstotheinflexiblerequirementsoftheBaselAccords,institutionsarefindingtheymustreplaceformalizedandnormativeapproacheswithnewtypesofriskmanagement.Theseprogramsmustbedetailedenoughtoaddresstherisksoftoday'sdynamicmarketsyetadaptableenoughtomeettheneedsofindividualinstitutionsandtheirrequirements-whileatthesametimeallowingdecision-makerstodemonstratetheirwillingnessandcapabilitytoeffectivelyhandleunseenriskandincreaseshareholdervalue."RiskManagementandCapitalAdequacy"examinesandexplainstoday'skeyapproachesforunderstandingandmanagingmarket,credit,andoperationalrisk.Thefirstbooktoprovidepractitionerswithstraightforwardandhands-ontechniquesforintegratingkeyriskmanagementapproaches,thisall-inclusiveresourcecoverstopicssuchas:thehistoryofmodernriskmanagement;regulatorymechanismsformanagingrisk;conceptualapproachesformodelingmarket,credit,andoperationalrisk;modernportfoliotheoryandthecapitalassetpricingmodel;usesandlimitationsofValueatRisk;theBISrisk-basedcapitalrequirementframework;KMV'screditmonitormodel;differencesincreditversusmarketriskmodels;KPMG'sLoanAnalysisSystemandotherrisk-neutralvaluationapproaches;productswithinherentcreditrisks;and,capitaladequacyissuesfromregulatoryandindustryperspectives.ItalsoincludesBaselCommitteeonBankingSupervisionandtheNewBaselCapitalAccordCasestudiesofMetallgesellschaft,Sumitomo,LTCM,andBarings.UnderthenewBaselguidelines,allfinancialinstitutionssubjecttolocalbankinglawswillberequiredtoadoptandoperateunderdramaticallydifferentriskexposurerulesandguidelines."RiskManagementandCapitalAdequacy"providesbankingexecutiveswithanintegratedriskmanagementframeworkthatisasseamlesstoimplementasitisself-explanatoryandcomplete.Itistoday'smostacross-the-boardexaminationofwhereriskmanagementstandstoday,whichrulesandguidelinesarelikelytochangeinthefuture,andhowinstitutionscanestablishprogramsthatmeetriskmanagementimperatives,limitriskcapitalrequirements,andprovidefortheintegrationofriskmanagementtocovertheglobalspectrumoftoday'sfinancialarena.