Jimmy Skoglund - Financial Risk Management: Applications in Market, Credit, Asset and Liability Management and Firmwide Risk

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Library of Congress Cataloging-in-Publication Data:

Skoglund, Jimmy, 1971

Financial risk management : applications in market, credit, asset and liability management and firmwide risk / Jimmy Skoglund, Wei Chen.

pages cm.(Wiley finance series)

Includes bibliographical references and index.

ISBN 978-1-119-13551-7 (cloth)ISBN 978-1-119-15723-6 (epdf)ISBN 978-1-119-15724-3 (epub)

Financial institutionsRisk management. 2. Banks and bankingRisk management. 3. Financial risk management. I. Chen, Wei, 1968 November 10 II. Title.

HG173.S575 2015

658.155dc23

2015020152

Cover Design: Wiley

Cover Image: barbol88/iStockphoto

In recent years risk management has become one of the fastest growing disciplines in the banking industry. It is certainly fueled by the fundamental intermediary role that banks play in the economy that expands globally with significant complexity. It is also driven by more risk-seeking behavior of the industry in order to achieve more profits. Another important reason is the increasing sophistication of the quantitative capability, including both methodology and technology. There have been many books on quantitative risk management. Most of them focus on specialized subjects. Only few advanced financial risk management books are application-oriented.

This book evolved over a number of years as the authors worked in banks and software companies with risk management analytics development and risk systems implementation. Our experiences with development and implementation of risk analytics in banks globally have inspired us to write a comprehensive quantitative oriented risk management book from a practitioner's point of view. The book discusses models and applications in the areas of market, credit, asset and liability management, and firmwide risk. An introductory chapter also reviews the economic foundation of modern risk management and how it has reached the current stage, the evolution of regulatory practices, the construction of financial risk systems, and the growing importance of model risk management as banks are required to perform more and more complex risk calculations that involve many models.

After the introduction, we continue with two chapters on market risk followed by chapters on portfolio credit risk, counterparty credit risk, liquidity risk, and funds transfer pricing and profitability analysis. While this book is mostly organized around the traditional market, credit, and other risk categories to provide contexts for the presentation of the risk methodologies, we cross reference different methodologies and risks, and dedicate two chapters to firmwide risk. These are the last chapters in the book, which discuss firmwide risk aggregation and firmwide scenario analysis and stress testing. Our intention is to provide a holistic view of the modern integrated yet modularized risk management practice.

In the past, quantitative methods were largely considered to be useful for risk measurement only and rarely served as input to the risk-based decision process. Quantitative methods are now frequently used to provide guidance to the risk management itself as well as assist in risk-based business decisions. This is another aspect of the comprehensiveness that we wish to demonstrate in this book. An important motivation of the book is to bring together the methodologies that can be applied across risk types and establish a common ground of quantitative approaches on which firmwide risk analysis can be established.

Since risk regulations have driven a lot of the recent practices, we also relate the concepts in the book to the most recent regulations in each risk area. In many cases the relation explains the risk-modeling foundation and in some cases also drawbacks of the risk regulations. However, this book is not a regular textbook overview on risk analysis in the sense that we have chosen to only include risk models and risk applications where we have acquired significant experience from both our research and actual implementations at banks. Hence, the book is significantly biased to the risk methods and models that we have found practically useful.

To put emphasis on the practical use of risk models the book includes many application examples illustrating how the models are used in practice. Therefore, our aim is to provide enough details that readers can actually implement the methods if they follow the discussions in this book. The book represents the collective experience of not only the authors but also the people we have worked with in the pastboth in banks and in risk technology.