Managing Extreme Financial Risk

Managing Extreme Financial Risk

Strategies and Tactics for Going Concerns

1st Edition - September 16, 2013

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  • Author: Karamjeet Paul
  • eBook ISBN: 9780124172227

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Managing Extreme Financial Risk addresses the need for better management strategies in light of increased market risk and volatility in financial institutions' revenue models.  Top officials from the financial and regulatory industries point to real corporate issues, showing how institutions react to financial crises. From first-hand experiences, they explain how effective sustainability management does not just prevent being blindsided; it also leads to proactive solutions that enhance an institution's strength to weather a sudden financial crisis, add significant shareholder value, and reduce systemic risk. Readable, coherent, and logical, Managing Extreme Financial Risk shows how extreme risk needs to be handled when the cost of being wrong means the difference between life and death of the institution.

Key Features

  • Based on the firsthand experiences and perspectives of senior-level executives
  • Concentrates on extreme risk, when the cost of being wrong is not the loss of profits, but the death of the institution
  • Written to be easily understood without algorithms, models, and quants


Executives, board members, and regulators as well as undergraduate and graduate students working in all subdisciplines of finance, especially risk management and financial institution management

Table of Contents

  • Section 1: The Need for a New Approach to Tail-Risk Management

    Chapter 1. Sustainability Management is Critical


    1.1 Disciplined Emphasis on Protection from Extreme Operational Risk

    1.2 No Similar Emphasis on Protection from Extreme Financial Risk

    1.3 Absence of Objective Parameters Accounts for the Lack of Proactive Emphasis

    1.4 Do Regulatory Requirements Address Effective Management of Tail Risk?

    1.5 Stress Testing

    1.6 Living-Will Provision

    1.7 Liquidity Reserves

    1.8 Going-Concern Management and Tail Risk

    1.9 Is the Need For Tail-Risk Management New?

    Chapter 2. Tail Risk is the Culprit: Tail Wagging the Dog?



    2.1 Credit Policy: A Watchdog Function without Any Glamor

    2.2 Credit Policy Role at Continental Bank

    2.3 Evolution of Revenue Models and the Watchdog Function

    2.4 Could the Problems of 2008 Have Been Avoided?



    Chapter 3. Need for a Distinct Focus on Tail Risk: In No Uncertain Terms


    3.1 Why a Distinct Approach?

    3.2 Effective Management Calls for a Distinct Focus on Sustainability Issues

    3.3 Sustainability Management Needs Distinct Parameters

    3.4 Three Distinct Legs of Risk Governance

    3.5 Is the Sole Focus on Risk Management Prudent?

    Chapter 4. Sole Focus On Traditional Risk Management Can Be Dangerous: Days of Future Passed


    4.1 A Mature Industry

    4.2 A New Driver of Revenues

    4.3 Days of Future Passed

    4.4 And Then a Blind-Side Blow

    4.5 A False Sense of Security

    4.6 Misplaced Use of Models

    4.7 Missing Focus on Tail Risk

    4.8 Regulatory Emphasis Encouraged Improper Use

    4.9 Sole Focus on Traditional Risk Management—Driven By Statistical Models—Can Be Misleading


    Chapter 5. Usefulness and Limits of Quant Models


    5.1 Chaos Theory Given Assumption of Normality

    5.2 Chaos Theory Given Assumption of Extreme Crisis


    Section 2: Elements of Sustainaliblity Management

    Chapter 6. If you Can’t Measure it, You Can’t Manage it: Taming Something That’s Lurking Around


    6.1 Prerequisite to an Effective Management Process

    6.2 An Example

    6.3 You Can Manage Exposure from Tail Risk Only if you can Measure it

    Chapter 7. Simplicity to Counter Complexities of Revenue Models


    7.1 Decision Making Enhanced by Advances in Technology

    7.2 Despite Technology and Quant Advances Human Decision Making Remains Simple

    7.3 Decisions Regarding Unquantifiable Uncertainty Require A Different Approach

    7.4 The Need for Simplicity is Critical In Complex Models

    7.5 Post-2008 Developments Have Increased Complexity

    7.6 A Simple Measure is Needed as Responding to Complexity with Complexity is a Recipe for Disaster


    Chapter 8. A New Measure for Effective Sustainability Management: Probable Maximum Loss


    8.1 A Simple Measure to Gauge the Sustainability of a Complex Model

    8.2 PML, As a Measure of Exposure from Extreme Tail Risk, Has Several Advantages

    8.3 PML Provides a Solid Tool for the Effective Management of Tail Risk

    Chapter 9. Continuous Readiness is Critical: A senior executive who wishes to remain anonymous


    9.1 Plans Are Useless, Planning is Indispensable

    9.2 Readiness Defined

    9.3 Degrees of Readiness

    9.4 Ready Intellectually and Emotionally

    9.5 Ready Intellectually, but Not Emotionally

    9.6 Ready Neither Intellectually, Nor …


    Section 3: Implementation Issues and the Wide-Reaching Impact on Institutions and the Financial System

    Chapter 10. Effective Sustainability Management: From Top to Bottom


    10.1 Key Parameters to Drive Risk Governance

    10.2 PML as a Measure of the Extreme Exposure Parameter

    10.3 Effective Tail-Risk or Sustainability Management

    10.4 Effective Sustainability Management to Protect Capital

    Chapter 11. Paradoxical Capital Problem


    11.1 The Need for a Bigger Cushion is Real Because of the Increased Pressure on Capital

    11.2 Increased Capital Solutions are Not Sustainable

    11.3 Increased Capital Solutions are Not Realistic

    11.4 A New Approach to Addressing the Need for a Bigger Cushion is Required

    11.5 Sustainability Management Offers a New Solution by Alleviating the Pressure on Capital

    11.6 Another Reason for a New Approach

    11.7 A Change is Needed in How Capital is Deployed


    Chapter 12. Capital as the Last Defense vs the First Defense


    12.1 More and Stronger Defenses Mean Less Pressure on Capital

    12.2 Sustainability-Enhancement Programs

    Chapter 13. Tail Risk, Regulatory Supervision, and Systemic Risk: Missing Links


    13.1 Regulatory Objectives

    13.2 Institutional Response

    13.3 Reconciling Objectives


    Chapter 14. Convergence of Regulatory Objectives and Institutional Interests: Alignment of Goals to Enhance Sustainability and Reduce Systemic Risk


    14.1 Apparent Conflict

    14.2 The Challenge

    14.3 Convergence towards Common Goals

    14.4 Reduction of Systemic Risk

    Chapter 15. Telling Your Story Effectively to Alleviate Marketplace Anxiety


    15.1 High Level of Anxiety

    15.2 A New Approach to Communicating Tail Risk Is Needed

    15.3 Reducing Anxiety, Building Greater Confidence, and Adding Shareholder Value

    15.4 Objective Public Policy Debate

    15.5 Too Complex to Manage?

    Chapter 16. Critical Factors in Preparing for an Extreme Financial Crisis: A former senior executive who wishes to remain anonymous


    16.1 AIG Timeline

    16.2 Key Observations

    16.3 Sound Human Judgment, Not Rocket Science

    16.4 Readiness at the Senior-Most Level

    16.5 Simplicity to Counter Complexities and Maintain Control

    16.6 Conclusions

    Chapter 17. From the Bane of the Revenue Model to a Competitive Advantage


    17.1 The Bane of a Financial Institution’s Revenue Model

    17.2 Urgent Need for Proactive Tail-Risk or Sustainability Management

    17.3 Proactive Tail-Risk Management Enhances the Ability to Respond to Crises

    17.4 Effective Sustainability Management Leads to Many Significant Advantages

    Chapter 18. Adapting Organizations to Effective Sustainability Management


    18.1 Organization Focus

    18.2 Implementation

    18.3 Conclusion


    Appendix. The Wall Street Journal

    The Fed’s Stress Tests Add Risk to the Financial System

Product details

  • No. of pages: 172
  • Language: English
  • Copyright: © Academic Press 2013
  • Published: September 16, 2013
  • Imprint: Academic Press
  • eBook ISBN: 9780124172227

About the Author

Karamjeet Paul

Karamjeet Paul has over 30 years of operating, finance, treasury, and exposure managment experience, giving him unique expertise in identifying and addressing critical risk-exposure-reward and other strategic issues at the highest levels in large organizations. Mr. Paul's perspective has been gleaned from hands-on experience in large global organizations, startups in entrepreneurial settings, and consulting assignments.

Affiliations and Expertise

Founder, Strategic Exposure Group

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