A global banking risk management guide geared toward the practitioner Financial Risk Management presents an in-depth look at banking risk on a global scale, including comprehensive examination of the U.S. Comprehensive Capital Analysis and Review, and the European Banking Authority stress tests. Written by the leaders of global banking risk products and management at SAS, this book provides the most up-to-date information and expert insight into real risk management. The discussion begins with an overview of methods for computing and managing a variety of risk, then moves into a review of the…mehr
A global banking risk management guide geared toward the practitioner Financial Risk Management presents an in-depth look at banking risk on a global scale, including comprehensive examination of the U.S. Comprehensive Capital Analysis and Review, and the European Banking Authority stress tests. Written by the leaders of global banking risk products and management at SAS, this book provides the most up-to-date information and expert insight into real risk management. The discussion begins with an overview of methods for computing and managing a variety of risk, then moves into a review of the economic foundation of modern risk management and the growing importance of model risk management. Market risk, portfolio credit risk, counterparty credit risk, liquidity risk, profitability analysis, stress testing, and others are dissected and examined, arming you with the strategies you need to construct a robust risk management system. The book takes readers through a journey from basic market risk analysis to major recent advances in all financial risk disciplines seen in the banking industry. The quantitative methodologies are developed with ample business case discussions and examples illustrating how they are used in practice. Chapters devoted to firmwide risk and stress testing cross reference the different methodologies developed for the specific risk areas and explain how they work together at firmwide level. Since risk regulations have driven a lot of the recent practices, the book also relates to the current global regulations in the financial risk areas. Risk management is one of the fastest growing segments of the banking industry, fueled by banks' fundamental intermediary role in the global economy and the industry's profit-driven increase in risk-seeking behavior. This book is the product of the authors' experience in developing and implementing risk analytics in banks around the globe, giving you a comprehensive, quantitative-oriented risk management guide specifically for the practitioner. * Compute and manage market, credit, asset, and liability risk * Perform macroeconomic stress testing and act on the results * Get up to date on regulatory practices and model risk management * Examine the structure and construction of financial risk systems * Delve into funds transfer pricing, profitability analysis, and more Quantitative capability is increasing with lightning speed, both methodologically and technologically. Risk professionals must keep pace with the changes, and exploit every tool at their disposal. Financial Risk Management is the practitioner's guide to anticipating, mitigating, and preventing risk in the modern banking industry.Hinweis: Dieser Artikel kann nur an eine deutsche Lieferadresse ausgeliefert werden.
JIMMY SKOGLUND is principal product manager of global risk products at SAS. He has more than fifteen years of market experience developing and implementing risk methodo ogies, and his articles have appeared in such publications as the Journal of Risk, Journal of Banking and Finance, and Journal of Risk Management in Financial Institutions. Jimmy holds a PhD from the Stockholm Schooof Economics. WEI CHEN is director of stress testing solutions at SAS. He has more than fifteen years experience in risk analytics and technology in banking and insurance, and he is an associate editor of the Journal of Risk Model Validation. His publications have appeared in severa journals including Journal of Risk and Journal of Risk Model Validation. Wei holds a PhD from the University of Iowa.
Inhaltsangabe
Preface xi Acknowledgments xvii CHAPTER 1 Introduction 1 Banks and Risk Management 1 Evolution of Bank Capital Regulation 4 Creating Value from Risk Management 9 Financial Risk Systems 10 Risk Analytics 11 Risk Infrastructure 13 Risk Technology 15 Model Risk Management 17 PART ONE Market Risk CHAPTER 2 Market Risk with the Normal Distribution 23 Linear Portfolios 24 Basic Model 24 Risk Measures 28 Risk Contributions 31 Estimating the Covariance Matrix of Risk Factors 39 Distribution of Risk Measures 40 Probabilistic Stress Testing 41 Quadratic Portfolios 43 Quadratic Portfolio Representation 44 Quadratic Portfolio Distribution 50 Calculation of Risk Measures for the Quadratic Portfolio 51 Simulation-Based Valuation 53 Example of Barrier Stock Options and Position Nonlinearity 54 Simulation from the Multivariate Normal Distribution 56 Risk Factor Dimension Reduction 60 Incorporating Model Estimation Error in the Simulation Scheme 65 Variance Reduction by Importance Sampling 66 Reducing Pricing Time 69 CHAPTER 3 Advanced Market Risk Analysis 75 Risk Measures, Risk Contributions, and Risk Information 75 VaR Interval Estimation 76 Coherent Measures of Risk 79 Simulation-Based Risk Contributions 80 Risk Information Measures 88 Risk Distortion Measures 93 Modeling the Stylized Facts of Financial Time Series 97 Univariate Time Series 97 Multivariate Time Series 110 Model Validation and Backtesting 122 A Multivariate Model of Risk Factor Returns 127 Time Scaling VaR and VaR with Trading 134 Time Aggregation of VaR with Constant Portfolios 134 Time Aggregation of VaR with Trading 135 Market Liquidity Risk 136 Closeout Time with No Liquidity Cost 137 A Note on General Market Illiquidity Models 140 Scenario Analysis and Stress Testing 142 Portfolio Sensitivity Analysis 143 Systematic Portfolio Stress Tests 143 Hypothetical Scenario from Reverse Stress Testing 147 Integration of Stress and Model Analysis 154 Portfolio Optimization 155 Portfolio Mean Risk Optimization 156 Cash Flow Replication 161 Developments in the Market Risk Internal Models Capital Regulation 165 PART TWO Credit Risk CHAPTER 4 Portfolio Credit Risk 171 Issuer Credit Risk in Wholesale Exposures and Trading Book 174 Market Pricing of Corporate Bonds 174 Merton's Structural Model for Corporate Bond Pricing 178 The Multivariate Merton Model 185 Applied Portfolio Migration and Default Risk Models 187 Economic Capital for a Portfolio of Traded Bonds 230 Credit Models for the Banking Book 235 The Binomial Loss Model 236 Credit Transition Score Models 242 Simulation of State Transitions and Markov Iteration 254 Mortgage Portfolio Risk Analysis: An Illustration 258 Point in Time and Through the Cycle Models-with Applications to Regulatory Stress Testing 277 An Economic Capital Model for Loan Portfolios 285 The Poisson Mixture Model and CreditRisk+ 289 Firmwide Portfolio Credit Risk and Credit Risk Dependence 296 Joint Codependency with Different Models 297 Indirect and Direct Codependency in Credit Risk Models 298 Credit Risk Stress Testing 299 Stress Testing with Multifactor Model 301 Stress Testing with Macroeconomic Credit Score Model 303 Features of New Generation Portfolio Credit Risk Models 309 Multi-Horizon Models for Banking Book 309 Modeling the Recovery Process for Banking Book Portfolios 310 Earnings and Loss Rather than Just Loss 311 Loan-Level Models 314 Granularity of Credit Factors 314 Hedging Credit Risk 315 Single-Name Credit Default Swaps 315 Credit Default Swaps on Portfolio Indices 320 Basket Credit Default Swaps 321 Regulatory Capital for Credit Risk 324 Regulatory Risk Components 326 Risk Mitigation and Regulatory Capital 327 Appendix 328 CHAPTER 5 Counterparty Credit Risk 333 Counterparty Pricing and Exposure 335 Market Standard Pricing Metrics 335 Assessment of Counterparty Default Probability 343 Exposure Simulation Framework for CVA 346 Market Correlations, Wrong-Way Risk, and Counterparty Pricing 360 Collateralized Exposures 364 CVA Risks 382 Portfolios of Derivatives 384 Netting 384 Marginal and Incremental Portfolio Trades 386 Recent Counterparty Credit Risk Developments 392 OIS Discounting for Derivatives 392 Advanced CVA Calculations and CVA Greeks 393 Funding Value Adjustments 394 Counterparty Credit Risk Regulation 395 Basel Counterparty Default Risk Charges 395 Enhanced Requirements on Counterparty Default Risk Charges 396 New Basel III Capital Requirements for Counterparty Credit Risk 397 Mitigating Regulatory Costs 399 PART THREE Asset and Liability Management CHAPTER 6 Liquidity Risk Management with Cash Flow Models 403 Measurement of Liquidity Risk 407 Liquidity Exposure with General Liquidity Hedging Capacity 408 Liquidity Exposure with Cash Hedging Capacity 411 Components of the Liquidity Measure 412 Liquidity Exposure 414 Balance Sheet Cash Flows and Facilities 417 Off-Balance-Sheet Derivative Flows 427 Combining the Risk and Finance View 428 Hedging the Liquidity Exposure 428 Ranking-Based Liquidity Hedging Strategy 432 Optimal Liquidity Hedging Strategy 433 Structural Liquidity Planning 441 Mitigating Balance Sheet Vulnerability with Contractual Cash Flows 442 Choosing the Optimal Liquidity Hedging Portfolio 445 Components of the Liquidity Hedging Program 449 Cash Liquidity Risk and Liquidity Risk Measures 450 Cash Liquidity at Risk 450 Portfolio Cash Liquidity Exposure 451 Allocating Cash Liquidity Risk 453 Regulation for Liquidity Risk 455 Liquidity Coverage Ratio 455 Net Stable Funding Ratio 458 Regulatory Liquidity Monitoring Tools 459 CHAPTER 7 Funds Transfer Pricing and Profitability of Cash Flows 463 Basic Funds Transfer Pricing Concept 465 Example of FTP for a Mortgage and a Loan 466 Risk-Based Funds Transfer Pricing 468 Credit Risk and Capital 468 Embedded Optionality 470 Liquidity Risk 477 Funds Transfer Rate and Risk Adjusted Returns 481 Example of Mortgage Risk Adjusted Returns 481 Profitability Measures and Decompositions 482 Balance Sheet Breakdown with Funds Transfer Instruments 482 Application to Net Interest Income and Economic Value View 483 Banking Book Fair Value with Funds Transfer Rates 486 Example of Fair Values with FTP 486 A Note on the Scope of Funds Transfer Pricing 486 Regulation and Profitability Analysis 487 PART FOUR Firmwide Risk CHAPTER 8 Firmwide Risk Aggregation 493 Correlated Aggregation and Firmwide Risk Levels 494 Linear Risk Aggregation 495 Copula Aggregation 497 Example of Copula Aggregation 497 Mixed Copula Aggregation 498 Example of Mixed Copula Aggregation 499 Capital Allocation in Risk Aggregation 501 Example of Mixed Copula Capital Allocation 502 Measuring Concentration and Diversification 503 Risk Aggregation and Regulation 503 CHAPTER 9 Firmwide Scenario Analysis and Stress Testing 507 Firmwide Scenario Model Approaches 509 Silo Approach 509 Firmwide Risk Model Approach 510 Multiple Model Approaches 512 Firmwide Risk Capital Measures 512 Risk Measures and Stress Scenarios 512 A Risk Reserve Approach-A Practical Illustration 514 Regulatory Stress Scenario Approach 516 Bank-Specific Approach: A Total Balance Sheet View 517 Bank-Specific Approach: More on Scenarios and Models 520 Systemic View: Financial System Analysis and Financial Contagion 523 The Future of Firmwide Stress Testing 524 References 527 Index 543
Preface xi Acknowledgments xvii CHAPTER 1 Introduction 1 Banks and Risk Management 1 Evolution of Bank Capital Regulation 4 Creating Value from Risk Management 9 Financial Risk Systems 10 Risk Analytics 11 Risk Infrastructure 13 Risk Technology 15 Model Risk Management 17 PART ONE Market Risk CHAPTER 2 Market Risk with the Normal Distribution 23 Linear Portfolios 24 Basic Model 24 Risk Measures 28 Risk Contributions 31 Estimating the Covariance Matrix of Risk Factors 39 Distribution of Risk Measures 40 Probabilistic Stress Testing 41 Quadratic Portfolios 43 Quadratic Portfolio Representation 44 Quadratic Portfolio Distribution 50 Calculation of Risk Measures for the Quadratic Portfolio 51 Simulation-Based Valuation 53 Example of Barrier Stock Options and Position Nonlinearity 54 Simulation from the Multivariate Normal Distribution 56 Risk Factor Dimension Reduction 60 Incorporating Model Estimation Error in the Simulation Scheme 65 Variance Reduction by Importance Sampling 66 Reducing Pricing Time 69 CHAPTER 3 Advanced Market Risk Analysis 75 Risk Measures, Risk Contributions, and Risk Information 75 VaR Interval Estimation 76 Coherent Measures of Risk 79 Simulation-Based Risk Contributions 80 Risk Information Measures 88 Risk Distortion Measures 93 Modeling the Stylized Facts of Financial Time Series 97 Univariate Time Series 97 Multivariate Time Series 110 Model Validation and Backtesting 122 A Multivariate Model of Risk Factor Returns 127 Time Scaling VaR and VaR with Trading 134 Time Aggregation of VaR with Constant Portfolios 134 Time Aggregation of VaR with Trading 135 Market Liquidity Risk 136 Closeout Time with No Liquidity Cost 137 A Note on General Market Illiquidity Models 140 Scenario Analysis and Stress Testing 142 Portfolio Sensitivity Analysis 143 Systematic Portfolio Stress Tests 143 Hypothetical Scenario from Reverse Stress Testing 147 Integration of Stress and Model Analysis 154 Portfolio Optimization 155 Portfolio Mean Risk Optimization 156 Cash Flow Replication 161 Developments in the Market Risk Internal Models Capital Regulation 165 PART TWO Credit Risk CHAPTER 4 Portfolio Credit Risk 171 Issuer Credit Risk in Wholesale Exposures and Trading Book 174 Market Pricing of Corporate Bonds 174 Merton's Structural Model for Corporate Bond Pricing 178 The Multivariate Merton Model 185 Applied Portfolio Migration and Default Risk Models 187 Economic Capital for a Portfolio of Traded Bonds 230 Credit Models for the Banking Book 235 The Binomial Loss Model 236 Credit Transition Score Models 242 Simulation of State Transitions and Markov Iteration 254 Mortgage Portfolio Risk Analysis: An Illustration 258 Point in Time and Through the Cycle Models-with Applications to Regulatory Stress Testing 277 An Economic Capital Model for Loan Portfolios 285 The Poisson Mixture Model and CreditRisk+ 289 Firmwide Portfolio Credit Risk and Credit Risk Dependence 296 Joint Codependency with Different Models 297 Indirect and Direct Codependency in Credit Risk Models 298 Credit Risk Stress Testing 299 Stress Testing with Multifactor Model 301 Stress Testing with Macroeconomic Credit Score Model 303 Features of New Generation Portfolio Credit Risk Models 309 Multi-Horizon Models for Banking Book 309 Modeling the Recovery Process for Banking Book Portfolios 310 Earnings and Loss Rather than Just Loss 311 Loan-Level Models 314 Granularity of Credit Factors 314 Hedging Credit Risk 315 Single-Name Credit Default Swaps 315 Credit Default Swaps on Portfolio Indices 320 Basket Credit Default Swaps 321 Regulatory Capital for Credit Risk 324 Regulatory Risk Components 326 Risk Mitigation and Regulatory Capital 327 Appendix 328 CHAPTER 5 Counterparty Credit Risk 333 Counterparty Pricing and Exposure 335 Market Standard Pricing Metrics 335 Assessment of Counterparty Default Probability 343 Exposure Simulation Framework for CVA 346 Market Correlations, Wrong-Way Risk, and Counterparty Pricing 360 Collateralized Exposures 364 CVA Risks 382 Portfolios of Derivatives 384 Netting 384 Marginal and Incremental Portfolio Trades 386 Recent Counterparty Credit Risk Developments 392 OIS Discounting for Derivatives 392 Advanced CVA Calculations and CVA Greeks 393 Funding Value Adjustments 394 Counterparty Credit Risk Regulation 395 Basel Counterparty Default Risk Charges 395 Enhanced Requirements on Counterparty Default Risk Charges 396 New Basel III Capital Requirements for Counterparty Credit Risk 397 Mitigating Regulatory Costs 399 PART THREE Asset and Liability Management CHAPTER 6 Liquidity Risk Management with Cash Flow Models 403 Measurement of Liquidity Risk 407 Liquidity Exposure with General Liquidity Hedging Capacity 408 Liquidity Exposure with Cash Hedging Capacity 411 Components of the Liquidity Measure 412 Liquidity Exposure 414 Balance Sheet Cash Flows and Facilities 417 Off-Balance-Sheet Derivative Flows 427 Combining the Risk and Finance View 428 Hedging the Liquidity Exposure 428 Ranking-Based Liquidity Hedging Strategy 432 Optimal Liquidity Hedging Strategy 433 Structural Liquidity Planning 441 Mitigating Balance Sheet Vulnerability with Contractual Cash Flows 442 Choosing the Optimal Liquidity Hedging Portfolio 445 Components of the Liquidity Hedging Program 449 Cash Liquidity Risk and Liquidity Risk Measures 450 Cash Liquidity at Risk 450 Portfolio Cash Liquidity Exposure 451 Allocating Cash Liquidity Risk 453 Regulation for Liquidity Risk 455 Liquidity Coverage Ratio 455 Net Stable Funding Ratio 458 Regulatory Liquidity Monitoring Tools 459 CHAPTER 7 Funds Transfer Pricing and Profitability of Cash Flows 463 Basic Funds Transfer Pricing Concept 465 Example of FTP for a Mortgage and a Loan 466 Risk-Based Funds Transfer Pricing 468 Credit Risk and Capital 468 Embedded Optionality 470 Liquidity Risk 477 Funds Transfer Rate and Risk Adjusted Returns 481 Example of Mortgage Risk Adjusted Returns 481 Profitability Measures and Decompositions 482 Balance Sheet Breakdown with Funds Transfer Instruments 482 Application to Net Interest Income and Economic Value View 483 Banking Book Fair Value with Funds Transfer Rates 486 Example of Fair Values with FTP 486 A Note on the Scope of Funds Transfer Pricing 486 Regulation and Profitability Analysis 487 PART FOUR Firmwide Risk CHAPTER 8 Firmwide Risk Aggregation 493 Correlated Aggregation and Firmwide Risk Levels 494 Linear Risk Aggregation 495 Copula Aggregation 497 Example of Copula Aggregation 497 Mixed Copula Aggregation 498 Example of Mixed Copula Aggregation 499 Capital Allocation in Risk Aggregation 501 Example of Mixed Copula Capital Allocation 502 Measuring Concentration and Diversification 503 Risk Aggregation and Regulation 503 CHAPTER 9 Firmwide Scenario Analysis and Stress Testing 507 Firmwide Scenario Model Approaches 509 Silo Approach 509 Firmwide Risk Model Approach 510 Multiple Model Approaches 512 Firmwide Risk Capital Measures 512 Risk Measures and Stress Scenarios 512 A Risk Reserve Approach-A Practical Illustration 514 Regulatory Stress Scenario Approach 516 Bank-Specific Approach: A Total Balance Sheet View 517 Bank-Specific Approach: More on Scenarios and Models 520 Systemic View: Financial System Analysis and Financial Contagion 523 The Future of Firmwide Stress Testing 524 References 527 Index 543
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