Academic journal article Journal of Risk and Insurance

Risk Managment

Academic journal article Journal of Risk and Insurance

Risk Managment

Article excerpt

Risk Management, Michel Crouhy, Dan Galai, and Robert Mark, 2001, New York: McGraw-Hill

Risk Management offers comprehensive coverage of the design and operation of a risk management system: its technical modeling and its interplay with the external regulations by which such a system is governed. More specifically, it provides a framework for viewing the policies, methodologies, data collection, and technical infrastructure used to support risk management. The book discusses investment, hedging, and management strategies. It focuses attention on the measurement of market, credit, and operational risks as integrated in a multiperiod market model as well as on liquidity risk and other long-term, horizon-risk management policies. The book looks at the role of the risk manager, often a key member of the senior executive team in any firm where risk is a key factor affecting corporate value, such as in banks and other financial and nonfinancial organizations. In this book, the authors provide the product of their academic research and their practical work in the field.

The first four chapters introduce the purpose and role of risk management: the place it holds in the institution and how the system itself is managed, particularly with regard to its regulation and its extensive internal role in guiding and meeting the requirements of the institution's external overseers. Chapter 1 treats the need for risk-management systems in financial institutions, while Chapter 2 covers the current international regulations governing banks. In Chapter 1, the authors point out that banks are increasingly engaged in what might be called "risk-shifting" activities. These activities continue to raise the ante for expertise and know-how in controlling and pricing the assets that banks manage in the marketplace (p. 2). As derivatives are the essential instrument of risk shifting, banks now practice not only capital intermediation but also risk intermediation. Chapter 1 also presents an interesting historical review of the evolution of various derivative products in different markets since their introduction in 1972.

Chapter 2 offers a good description of the foundation and historical evolution of the regulatory environment in which banks currently operate, stressing in particular the links with deposit insurance. As we shall see Chapter 4 analyzes current regulations for market risk in detail because we come back to this later. And Chapter 1 reviews the basis of portfolio management, a concept that will be revisited in many chapters of the book. The authors are particularly strong advocates of the need to develop a portfolio-management approach to credit risk to obtain an accurate diversification of this risk and help different institutions develop adequate overall credit-risk strategies for setting optimal capital requirements. The last part of Chapter 2 provides a critical review of the current regulatory environment and analyzes the different proposals for the next Bank of International Settlements (BIS) accord, now scheduled for 2005.

Chapter 3 is concerned with a framework for best practices in risk management, while Chapter 4 reviews, in detail, the current BIS capital requirement for market-risk management and compares standardized models to the internal models that banks can use for reporting regulatory capital. Institutions often fail to structure and supervise risk management even though this is fundamental to obtaining the desired results. The fact that two of its authors have experience in banking is a plus for the book. They detail how risk management is organized in a financial institution, with special emphasis on those authorized to control risk in the organization. According to the authors, everyone in the firm must understand the roles and responsibilities related to risk management, including its links with senior management, trading-room management, and operations. Two elements crucial to an efficient risk-management system are the process for delegating authority and the structure for monitoring risk. …

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