Financial Risk Management

Protect your organization against financial misconduct

In Financial Risk Management: From Metrics to Human Conduct, Frantz Maurer delivers a thorough and practical review of the core methods used by professionals in the real world to reduce the risk of financial misconduct. Starting with the key points of banking regulation, the author then describes in simple terms the most extensively used risk metrics in the banking industry. Readers can fully grasp and implement the techniques discussed within without a strong background in probabilities or statistics. The last part of the book focuses on conduct risk markers and show how to implement a conduct risk index that benchmarks the conduct of natural risk-takers like traders.

The author describes how to marry this simple approach to financial risk with a conduct risk index that benchmarks the conduct of natural risk-takers, like traders.

Readers will also find:

• Step-by-step guidance on how to apply common risk indicators to real-world situations
• Actionable advice for improving the resilience of financial institutions against individual misconduct and misbehavior

A holistic and non-quantitative approach to a subject of critical importance, Financial Risk Management: From Metrics to Human Conduct will earn a place in the libraries of risk managers, compliance professionals, and master's level students in business administration and finance.

Foreword ix

Acknowledgements xi

List of Acronyms and Symbols xiii

Introduction xvii

Part One Navigating Banking Regulation

Chapter 1 A Brief History of the Basel Framework 3

Chapter 2 The Basel I Regulatory Framework and the Cooke Ratio 7

Chapter 3 Amendment to the Basel I Framework to Incorporate Market Risks 15

Chapter 4 Implementation of the Basel II Framework 21

Chapter 5 A Guided Tour of the Basel III Framework 29

Chapter 6 Climate- Related Financial Risks 41

Part Two The Financial Risk Measurement Landscape

Chapter 7 Historical Approach to Risk 47

Chapter 8 The Gaussian Framework 61

Chapter 9 A Brief Overview of Monte Carlo Simulation 75

Chapter 10 Risk Contribution 79

Chapter 11 Shortcomings of Risk Metrics 93

Chapter 12 Ex- Post Evaluation of a Risk Model: Backtesting 103

Chapter 13 A Forward- Looking Evaluation of Risk: Stress Testing 109

Part Three Getting Conduct Risk to Scale

Chapter 14 The Big Picture of Conduct Risk 119

Chapter 15 Markers of Conduct Risk 123

Chapter 16 Worked Example 7: Building a Conduct Risk Score 127

Chapter 17 Fostering a Culture of Appropriate Conduct Outcomes 137

Chapter 18 Worked Example 8: Calculating a Risk-Taker’s Conduct Risk Index 143

Chapter 19 Hot Questions Still Pending 159

Chapter 20 Understanding the Root Causes of Poor Conduct 163

Appendix 173

References 181

Contents 183

List of Figures 187

List of Tables 189

Index 191

FRANTZ MAURER is a Professor of Finance and the head of the accounting, finance and economics department at KEDGE Business School. He has also taught at HEC Paris, the University of Bordeaux, ESCP Business School, and University Paris Saclay.

Since 2009, European and North American banks have paid out approximately $394 billion in penalties and fines for compliance violations. Many of these losses came as the result of misconduct by banking officials at all levels of the organizations involved.

In Financial Risk Management: From Metrics to Human Conduct, Frantz Maurer delivers an incisive and practical guide to the deployment of an effective risk management approach that addresses both financial risk and the risk of misconduct by the people in your firm.

With a strong focus on the core methods actually used by compliance and risk professionals in the real world, this book explores methods like Value-at-Risk and Expected Shortfall to explain how you can address the most relevant and significant financial risks facing your company today.

Financial Risk Management employs a pragmatic and non-quantitative approach to the subject, allowing you to understand key risk measurement and management strategies without the need for complex mathematics. It also describes methods you can implement immediately to catch the early-warning signals of employee misconduct that could give rise to catastrophic losses and penalties.

Perfect for master’s level students in business administration and finance, this book will also benefit risk managers, compliance officers and personnel, and other practitioners operating within financial institutions.

PRAISE FOR
FINANCIAL RISK MANAGEMENT

“Frantz reviews Risk Management in the light of a number of recent events where ‘behavior risk’ was much more costly for the financial institution than any type of model misspecification. An intelligent book offering a new and necessary avenue to think about financial risks.”
—Helyette Geman, Department of Applied Mathematics, Johns Hopkins University

“Frantz experience and views on conduct are really refreshing. The book provides a good mix of lessons learned from real life examples and robust approaches to deal effectively with one of the bigggest challenges in financial services: ensuring that people behave and conduct themselves appropriately by finding the right balance between personal, clients and firm interests.”
—Pierre Pourquery, Partner at EY, UK Head of Capital Markets, European lead of the digital assets solution for Banking Capital Markets

“A book every aspiring manager and risk taker in bank should have read and re-read.”
—Pascal Quiry, active investor and BNP Paribas professor of finance, HEC Paris