The State of Market Risk Management

By Zeltkevic, Michael | The RMA Journal, June 2007 | Go to article overview

The State of Market Risk Management


Zeltkevic, Michael, The RMA Journal


[ILLUSTRATION OMITTED]

Market risk is often considered one of the more mature areas of risk management; the sophistication with which it is managed outstrips that of credit, legal, operational, and reputational risks. Rate risk has long been the stock-in-trade of commercial banks, while trading risks were the first to be put on a properly quantitative basis with the development of analytical models of volatility and portfolio risk.

However, the background against which market risk is taken and managed continues to evolve. Over the past few years, an increasing proportion of activity has revolved around complex and structured products, which frequently blur the lines between market and credit risks, and a shift has begun toward proprietary risk-taking. The resulting organizational, theoretical, and technological challenges have attracted scrutiny from regulatory authorities and internal watchdogs.

Oliver Wyman recently conducted two studies of market risk practice. The first covered major universal and investment banks, while the second focused more narrowly on the market risk issues associated with the hedge fund industry. This article presents the state of market risk management today as seen by the survey respondents and points out some potentially productive avenues for industry consideration.

The New World of Market Risk

Global capital markets have enjoyed a few strong years, as evidenced by a steady climb in revenues since 2002. Credit businesses have led the way, buoyed by the growth of high-yield and distressed debt, structured derivatives and collateralized debt obligations (CDOs), products for retail and high-net-worth investors, and alternative and hedge fund investments. Equity businesses also have done well, as profitability has been turned around by firms' increased appetite for risk--particularly in proprietary trading.

Rate businesses have fared less well, with the interest rate environment limiting the scope of potential risk taking and eroding some client-driven revenues. The pace of securitization has slowed in retail mortgages while accelerating in the commercial sector; "principal finance" models are catching on in both the asset- and mortgage-backed sectors. Derivatives have become more widely used--by both the buy and sell sides--for hedging, proprietary trading, yield enhancement, and other purposes.

A risk gravity shift. In terms of business mix, margin compression in flow businesses has been offset by growth in structured products across all asset classes.

The effect has been to shift risk management's center of gravity, as such products are becoming not only more common but also more complex--mixing risk types and often requiring considerable customization. CDOs and convertible equity products, for example, may integrate credit risk with several types of market risk, as well as legal and reputational risks.

Many firms have also become more reliant on proprietary risk taking. Leading investment banks have seen trading revenues across the board grow by approximately 10% since 2001; in some areas, including fixed income, the increase has been far more pronounced. The price paid for these returns is increased volatility: One-day value at risk (VaR) has risen by more than 60% across the industry.

A general trend toward risk taking is most evident in the rise of the hedge fund industry. Capital is still pouring in, creating an increasing number of funds big enough to demand favorable credit terms from dealers and build diversified businesses, including such comparatively stable, cash-flow-driven businesses as loan portfolio management and reinsurance. Dealers, for their part, are responding by investing in the talent and products needed to attract and retain lucrative hedge fund business.

A changed risk management environment. These trends--toward structured products, derivatives, risk taking, proprietary trading, and hedge funds--have substantially reshaped the environment for market risk management. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The State of Market Risk Management
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.