A Risk Professional�s Survival Guide

A Risk Professional's Survival Guide fills a critical gap left by existing risk management texts. Instead of focusing only on quantitative risk analysis or only on institutional risk management, this book takes a comprehensive approach. The disasters of the recent financial crisis taught us that managing risk is both an art and a science, and it is critical for practitioners to understand how individual risks are integrated at the enterprise level.

This book is the only resource of its kind to introduce all of the key risk management concepts in a cohesive case study spanning each chapter. A hypothetical bank drawn from elements of several real world institutions serves as a backdrop for topics from credit risk and operational risk to understanding big-picture risk exposure. You will be able to see exactly how each rigorous concept is applied in actual risk management contexts. This book includes:

• Supplemental Excel-based Visual Basic (VBA) modules, so you can interact directly with risk models
• Clear explanations of the importance of risk management in preventing financial disasters
• Real world examples and lessons learned from past crises
• Risk policies, infrastructure, and activities that balance limited quantitative models

This book provides the element of hands-on application necessary to put enterprise risk management into effective practice. The very best risk managers rely on a balanced approach that leverages every aspect of financial operations for an integrative risk management strategy. With this book, you can identify and control risk at an expert level.

Preface ix

Acknowledgments xi

About the Author xiii

Chapter 1 Navigating Risk at Sifi Bank 1

Chapter 2 Overview of Financial Risk Management 33

Chapter 3 Risk Governance and Structure 61

Chapter 4 Economic Capital, Risk-Adjusted Performance, and Capital Allocation 83

Chapter 5 Credit Risk Theory 115

Chapter 6 Consumer Credit Risk Measurement 145

Chapter 7 Commercial Credit Risk Overview 193

Chapter 8 Credit Risk Mitigation 223

Chapter 9 Interest Rate Risk 255

Chapter 10 Market Risk 287

Chapter 11 Liquidity Risk Management 311

Chapter 12 Market Risk Hedging 345

Chapter 13 Hedging Interest Rate Risk 375

Chapter 14 Operational Risk Management 405

Chapter 15 Model, Regulatory, Legal, and Reputational Risk Management 431

Chapter 16 Toward Integrated Risk Management 461

Answer Key 477

Index 497

CLIFFORD ROSSI is Professor-of-the-Practice and Executive-in-Residence at the Robert H. Smith School of Business at the University of Maryland. He also has nearly 25 years' experience in banking and government. Dr. Rossi's most recent position was Managing Director and Chief Risk Officer for Citigroup's Consumer Lending Group. He has also held senior risk management positions at Freddie Mac and Fannie Mae. Dr. Rossi is frequently quoted on financial policy issues in major newspapers and has appeared on Fox News, C-SPAN, and CNN's Situation Room.

By applying risk management concepts to a single fictional institution, A Risk Professional's Survival Guide shows core risk concepts in action, providing a unique reference for financial risk practitioners in institutions of all sizes. SifiBank—modeled on the systematically important financial institutions (SIFIs) that have come under intense scrutiny since the financial crisis of 2008—is a large, albeit fictional, financial institution with business concerns at almost every level of the economy. Its size and complexity expose SifiBank to countless forms of risk, making it an excellent case study in risk management.

The single case study approach is not the only unique aspect of A Risk Professional's Survival Guide. In keeping with the history of the field, many of the risk management guides published over the past few decades have had a heavily quantitative leaning. As the 2008 financial crisis showed, pure quantitative analysis, no matter how sophisticated, has its limitations. Clifford Rossi understands the importance of having access to reference materials that reflect the current state of reality. A Risk Professional's Survival Guide combines the science of risk management with the qualitative art, making this one of only a few risk management guides to align with contemporary best practices.

It is no longer advisable or even possible to view risk as a self-contained calculation. Risk management outcomes ripple across businesses, sometimes generating further risks down the line. Ultimately, a risk practitioner's role can impact the entire world economy. A Risk Professional's Survival Guide takes a big-picture approach to risk management, putting readers in touch with a forward-looking conception of financial risk.

Applied Risk Management as a Science and an Art

Up-and-coming risk management practitioners need a new framework—and so does everyone else. After 2008, we understand the limitations of lopsidedly quantitative risk analysis in excruciating detail. A Risk Professional's Survival Guide takes a more balanced tack. Complex equations are no substitute for judgment and experience, and knowing how to use the right equations at the right time is invaluable.

A Risk Professional's Survival Guide is appropriate for readers with technical backgrounds as well as general or executive readers. It follows the risk management story of SifiBank, a fictional, too-big-to-fail financial institution that is rethinking risk on the heels of a significant bailout. Using synthetic data, including SifiBank's detailed balance sheets, you'll be able to work through realistic problems and see how the results ripple throughout the business.

For those who want to get their hands dirty, Excel/VBA workbooks are available as an interactive add-on. Chapter overviews and summaries will be of interest to executives and practitioners in need of a desk reference. A Risk Professional's Survival Guide is a must read whether you are a risk professional or executive.