Samenvatting risk management
Introduction
What is risk?
• What can go wrong? --> Risk drivers
• How likely is this? --> Probabilities
• If it does, what is the result? --> Impact/loss
• In this course we focus on risks faced by companies, with a particular emphasis on:
• Financial institutions (as opposed to corporates)
• Financial risk (as opposed to operational risk, reputational risk,....)
• However most of the concepts and tools developed are
applicable in a more general context.
Tools for risk management
• A risk is characterised through:
Set of outcomes: these are the impacts of scenarios that may occur during a
selected timeframe (the horizon).
Probabilities of these outcomes.
• Mathematically: a risk is a random variable.
,Risk drivers
Example: Solvency II framework
Risk Management is, or should be, a core skill for all companies
• Risk management is an inherent part of running any business:
• Shareholders want a good balance between return (opportunity) and volatility
(danger)
• Avoiding bankruptcy or a rating downgrade is of crucial importance
for any company and needs to be dealt with as well.
• Note that for the financial industry, it is even more important for the following
reason:
• Insolvency may have a big impact on the (global) economy
• Banks are interconnected, which creates systemic risk
Different stakeholders, different views
,Recent financial scandals are, at least partially, due to inadequate risk taking and
management
Bubbles
• Large losses can be company specific, e.g. Barings
• Bank
• Systemic events:
o Are of all ages
▪ Tulip bubble
▪ South sea company
▪ Dotcom bubble
▪ Credit crisis
• Aren’t financial markets supposed to be efficient? If it does go wrong, how bad can it
get?
•
Chapter 6
The Credit Crisis of 2007
U.S. Real Estate Prices, 1987 to 2014:
S&P/Case-Shiller Composite-10 Index
, Asset Backed Security (Simplified)
assets are mortgages
SPV= Special Purpose Vehicle
total notional = underlying assets
The Waterfall
Introduction
What is risk?
• What can go wrong? --> Risk drivers
• How likely is this? --> Probabilities
• If it does, what is the result? --> Impact/loss
• In this course we focus on risks faced by companies, with a particular emphasis on:
• Financial institutions (as opposed to corporates)
• Financial risk (as opposed to operational risk, reputational risk,....)
• However most of the concepts and tools developed are
applicable in a more general context.
Tools for risk management
• A risk is characterised through:
Set of outcomes: these are the impacts of scenarios that may occur during a
selected timeframe (the horizon).
Probabilities of these outcomes.
• Mathematically: a risk is a random variable.
,Risk drivers
Example: Solvency II framework
Risk Management is, or should be, a core skill for all companies
• Risk management is an inherent part of running any business:
• Shareholders want a good balance between return (opportunity) and volatility
(danger)
• Avoiding bankruptcy or a rating downgrade is of crucial importance
for any company and needs to be dealt with as well.
• Note that for the financial industry, it is even more important for the following
reason:
• Insolvency may have a big impact on the (global) economy
• Banks are interconnected, which creates systemic risk
Different stakeholders, different views
,Recent financial scandals are, at least partially, due to inadequate risk taking and
management
Bubbles
• Large losses can be company specific, e.g. Barings
• Bank
• Systemic events:
o Are of all ages
▪ Tulip bubble
▪ South sea company
▪ Dotcom bubble
▪ Credit crisis
• Aren’t financial markets supposed to be efficient? If it does go wrong, how bad can it
get?
•
Chapter 6
The Credit Crisis of 2007
U.S. Real Estate Prices, 1987 to 2014:
S&P/Case-Shiller Composite-10 Index
, Asset Backed Security (Simplified)
assets are mortgages
SPV= Special Purpose Vehicle
total notional = underlying assets
The Waterfall
