Managing financial risks

As financial services firms adopt new product lines, enter new markets and lose the protection of traditional industry barriers, managing risk has become a major concern. In today's financial markets, many firms offer products and services that cross what had once been traditional boundaries. As a result, they must now manage default, interest-rate and market risks as well as risks associated with liquidity and operations.

To address such wide-ranging risks, financial services firms now require new business practices in order to control, transfer and profitably manage the broader risks they now regularly assume. To help identify those practices, the Center has sent faculty researchers and doctoral students into the field to analyze the current risk systems of commercial banks, investment firms and insurance companies.

Key studies, forums and programs

The Center has offered its initial risk management findings to the industry in a status report on risk management system implementation. In addition, key researchers led by Anthony Santomero, former Center director, have discussed these findings in forums with industry leaders, federal regulators and other interested parties. For some of the research findings, please see our Working Papers The Place of Risk Management in Financial Institutions and Commercial Bank Risk Management: An Analysis of the Process.

Among its findings, the research team found that risk management practices within specific industry sectors were seen to be uneven, at best, and there is even wider variation across the industry as a whole. Subsequent discussion with industry practitioners and regulators has led to significant improvement of the industry's risk management practices.

The Center's has also hosted a number of academic conferences on risk management, focusing specifically on the insurance and banking sectors. The series has drawn leading scholars and practitioners from around the world to examine new frontiers in risk theory and practice.

In yet another initiative, the Center has joined with consumer lending executives to forge a multi-year investigation of retail credit. The study's topics include analyses of credit availability, its impact on the economy, the causes and effects of personal bankruptcy, and the public policy implications surrounding these issues.

The Center is also conducting an annual Financial Risk Management Roundtables series co-sponsored with Oliver, Wyman & Co. that focuses on trading risk management and measurement. The Roundtable brings together leading academics and practitioners to examine current issues related to risk management in highly complex, global trading environments.

Topics addressed during past Roundtables include:

  • market contagion and crisis management
  • the legal implications of measuring and managing global financial risk
  • modeling crash probabilities
  • using scaling to convert from short- to long-horizon volatility
  • mechanisms for adequate risk-adjusted performance measurement
  • compensation and methodologies for measuring market estimates of asset risk
  • creating value in the life insurance industry
  • innovation and risk management in real estate markets
  • model governance and model validation
  • liquidity risk management in crisis conditions
  • managing credit risk after the sub-prime lending crisis

Through discussions on such topics, the Financial Risk Management Roundtables are fulfilling their goal to explore new trading risk frontiers and to question existing risk measuring methodologies in light of available empirical evidence.