Risk Transparency
Risk Transparency
Sanjay Sharma
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This report, written by highly-experienced industry expert Sanjay Sharma, investigates factors that can inhibit financial institutions and other entities from providing full disclosure of the risks underlying their strategies, portfolios and performance. The author surveys disclosure practices that are generally followed, with relevant examples and commentary on their effectiveness and weaknesses. Prescriptive chapters illustrate how to overcome the drawbacks of disclosure and will also touch upon the evolution of regulatory standards and emerging trends in the aftermath of the financial crisis.
In the aftermath of the global financial crisis, the issue of risk transparency is at the forefront of the minds of management, investors and regulators alike. Questions are arising surrounding risk transparency as it relates to, or is provided by, exchanges and markets, central banks and regulators. Ensure you are fully informed and equipped to deal with these questions.
“You will find no better guide to the practice of professional risk management today than Sanjay Sharma's new book, Risk Transparency. Dr. Sharma provides a step-by-step guide on how you can harness critical risk information to provide insight and actionable information to risk takers and senior management.
In a voice that is both engaging and authoritative, Dr. Sharma accompanies you on a joint quest to develop risk templates and disclosures that will empower decision makers. Dr. Sharma becomes your co-pilot as you review all the critical components: Market, Credit, Liquidity, and Operational Risk. There are also special chapters devoted specifically to Systemic Risk, Regulation, and Institutional Disclosure…
…Risk Transparency is chock-full of insights, helpful tips, and pitfalls to be avoided. The author provides comparative presentations and side-by-side tabular and graphic formats and explains what works and how it works well. He explains where your emphasis should be focused and how to best interact with senior management and risk takers.”
Donahoe, former Senior Risk Officer at Barclays Capital and RB
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Table of contents
1.Risk Transparency: An Overview
Foundational Framework Barriers to Risk Transparency Ensuring Transparency Conclusion 2.Risk and Uncertainty: The Foundation of Transparency
Definitional Frameworks Conclusion Appendix 2.1: Risk and Uncertainty – a Case Study
3.Model Risk
Overview of Quantitative Models Components of Quantitative Models Model Implementation Flaws and Limitations of Quantitative Models Model Risk Components Model Interpretation Model Risk Management Framework Model Transparency Conclusion Appendix 3.1: A Complete Mathematical Description of the Black–Scholes Model Appendix 3.2: A Qualitative Description of Black–Scholes Model with Limitations, Assumptions Etc Appendix 3.3: A Qualitative Description of the Cox–Ingersoll–Ross Model Appendix 3.4: A Qualitative Description of a Mortgage Portfolio Cashflow Modelling Framework
4.Credit Risk
Introduction Credit Risk versus Market Risk Credit Risk Transparency: Part I Classification of Debt and Credit Sensitive Risk Assets Quantification of Credit Risk Credit Risk Transparency: Part II Conclusion Appendix 4.1: Structured Credit Portfolios and Securitisation Appendix 4.2: Case Study of Transparency Associated with Collateralised Loan Obligations (CLOs)
5.Market Risk
Introduction Market Risk Measurement Interest-rate and Other Risk Measures Valuation Framework Decomposition and Analysis of Revenue and Profitability Conclusion
6.Liquidity Risk
Introduction Categorisation of Liquidity Risk Asset–liability Management Sound Liquidity Management Practices Practical Considerations Measurement of Liquidity Basel III Liquidity Framework Transparency of Liquidity Risk Conclusion
7.Operational Risk
Definition of Operational Risk Taxonomy and Framework for Operational Risk Operational Risk Transparency – Part I Management of Operational Risk Operational Risk Transparency – Part II Conclusion Appendix 7.1: Development of Operational Risk Thresholds Appendix 7.2: Sample Scenario Analysis – External Fraud
8.Value-at-Risk
Conceptual Foundations of VaR Evolution of VaR as a Measure of Risk Computational Overview Dynamics and Limitations of VaR Recommendations for Making VaR Transparent and Actionable Conclusion
9.Stress Testing
Introduction and Historical Perspective Foundations Stress Testing Framework Scenario Creation Reverse Stress Testing Stress Testing of Specific Risks and Exposures Systemic Stress Testing and Central Banks Considerations for Stress-Test Design and Implementation Conclusion Appendix 9.1: Stress-Test Case Study Appendix 9.2: Illustration of Interactive Stress-Testing and Reporting Framework Appendix 9.3: Examples of Historical and Hypothetical Scenarios
10.Institutional Disclosure
Introduction Barriers to Institutional Transparency Framework for Institutional Disclosure Illustrative Disclosure Samples Conclusion
11.Systemic Risk
Overview Systemic Stability Versus Resilience Systemic Risk as Negative Externality Anatomy of a Systemic Risk Event Measurement of Systemic Risk Systemic Risk Transparency, Associated Challenges and Recommendations Structure of a Systemic Transparency Framework Conclusion Appendix – 11.1: the 2008 Global Financial Crisis – a Case of Observable Vulnerabilities
12.Regulation
Overview of Financial Regulation Goals of Financial Regulation Goals of Regulatory Transparency Organisation of Regulatory Bodies Policy Formulation and Overview of Regulatory Standards Challenges for Transparency Related to Regulatory Standards Moral Hazard Bank Capital Unintended Consequences of Regulation Multiplicity of Standards and Regulatory Bodies Countercyclical Capital Buffers Supervisory Transparency Observation of and Transparency in Institutional Cultures Conclusion