Managing Extreme Financial Risk

1st Edition

Strategies and Tactics for Going Concerns

Print ISBN: 9780124172210
eBook ISBN: 9780124172227
Imprint: Academic Press
Published Date: 25th September 2013
Page Count: 172
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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

Dedicated to Walter B. Wriston


About the Author

About the Contributors




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



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"...develops a simple but still effective framework for handling extreme financial risk…focuses on a broad and holistic understanding of the concept rather than on a detailed implementation and problem discussion."--Financial Markets and Portfolio Management, Managing Extreme Financial Risk

"When it comes to the tail risk, Karamjeet Paul encourages senior management to shelve quantitative models and address capital sustainability instead. The book has implications for market participants who work with such unknowns as  99.5%-iles of a deal or portfolio profit and loss distributions." - Sergei Esipov, Quant-Isle

"Karamjeet Paul makes a convincing case for addressing the fundamental issue of 'tail risk' to protect financial institutions and the financial system. Despite all the talk to 'do something' following the 2008 crisis, the impact of tail risk has not been addressed.  Managing Extreme Financial Risk should be required reading for regulators, board members, CEOs and CFOs of large financial institutions." -Vashishta Bhaskar, Duquesne University

"My first impression when I came across Mr. Paul’s book was that it was probably yet one more book by a consultant providing simplistic and not very insightful advice. I was wrong. Mr. Paul is clearly someone who totally understands the dimensions of risk confronting financial institutions, and has thought deeply about it. His message: the only way to survive the next crisis, which can’t be predicted, is to know your extreme-tail risk now and manage it proactively. Drawing on extensive experience (including 14 years at Citicorp where he was once CFO of its global investment bank and where he developed the interest-rate-gap management approach), Mr. Paul eloquently lays out in plain English, free of technical jargon, a new approach to managing extreme-tail risk. Supplemented by real-life stories and analogies,