Banking Risk Management in a Globalizing Economy
Ewedemi, Soga, Journal of Risk and Insurance
Banking Risk Management in a Globalizing Economy, by Panos Angelopoulos and Panos Mourdoukoutas, 2001 Quorum Books, Westport, Connecticut, London. The contents of the book indicate familiarity of the author(s) with the working knowledge of the market, its mechanics, and intricacies. It is obvious that in addition to describing available derivative instruments that can be employed to manage risk, and distinguishing one from another, the advantages and disadvantages of some of the derivatives in specified circumstances were clearly stated. Also, the authors succeeded in presenting the material in a nonthreatening style to readers who are unfamiliar with the subject. However, the book in its present form should be read with care. An adequate effort in editing the current version would enhance the clarity and quality of the book.
In the introductory chapter, the dual objective of the book was clearly enumerated. Angelopoulos and Mourdoukoutas (A&M) set out first to examine the transformation of the banking industry from that of passive intermediation to active asset-liability risk management. Second, they reviewed the conventional on-balance sheet and modern off-balance sheet approaches to managing credit, interest rate, and foreign exchange risks with emphasis on the use of derivatives.
A&M distinguish between traditional and nontraditional banking risks in chapter 2. Liquidity, credit, political, and legal, as well as operation risks are included in the first, while the second is subdivided into market and other risks. They discuss interest rate and foreign exchange risks under market risk, while other risks consist of commodity price, investment portfolio, and financial derivative risks. The authors show that the classification of risk referred to above is not universal. For example, the U.S. Comptroller's Office utilizes nine categories of risk classification: foreign exchange, interest rate, price, liquidity, credit, transaction, compliance, reputation, and strategic. Other classifications include the Federal Reserve Bank's six categories, and the European Union's classification. Chapter 2 also covers duration, gap analysis, convexity, and two aggregate measures of risk, namely, value at risk (VAR) and total risk management (TRM).
In chapter 3, the authors step back to develop the evolution of banking risk management from the period of "multinationalization" to "globalization." Relevant banking legislation, Basle Committee Rules and corresponding European Union (EU) Directives are referred to. The authors describe the financial derivatives in chapter 4, including forwards, futures, options, swaps, caps, floors, collars, and swaptions. Chapters 5, 6, and 7 discuss, respectively, credit risk management, interest rate risk management, and foreign exchange risk management. The final chapter summarizes the content of the book.
It would appear from the organization of the book that the authors had a difficult time deciding if chapter 3 on the evolution of banking risk management should precede or follow chapter 2. It is probable that switching chapters 2 and 3, that is, discussing the evolution of banking risk management before comparing and contrasting the traditional to the nontraditional risks, would have provided for a smoother transition to chapter 4 where the derivatives are described.
The authors point out that for four decades after the Great Depression, the operation of separate national and local markets led to information inefficiencies, and that governments created sanctuaries for separate national markets, thereby providing a low-risk environment for multinational corporations. …