RISKMANAGEMENT
be presented to the Board as part of Summary
the risk reports. Scenarioanalysisandstresstestslieattheheartofmodernfinan-
The inclusion of senior management cial risk management. Leading firms are designing and implement-
in stress test committees also allows ingcomprehensivestresstestingprogrammestomanagethefirm’s
for the evaluation of potential macro- sensitivity to extreme market, credit and operational risks. Those
hedges to mitigate large risks that lay firms are finding that the firm’s survival is a function of proactive
above the risk tolerance of the firm. management of extreme risks, and senior management must be
That way, senior management would made directly accountable for the design and execution of stress
be ultimately accountable to manage testingprogrammes
•
Senior management must be made Carlos Blancois Managing Director of NQuantX, LLC, a financial
directly accountable for the design and
engineering firm that develops software for portfolio valuation and risk
management. He is also Managing Director of Black Swan Risk Advisors,
execution of stress testing programmes
LLC, a firm providing risk advisory and financial engineering services to
assist in the design, development and validation of trading, optimisation
firmwiderisks,andnotrelyexclusively
and hedging strategies for energy and financial services firms worldwide.
on business line management. The
www.blackswanrisk.com
transfer of ownership of the business
line risks into the senior management
Footnotes
of the firm may create elements of
1. Supervisors Group (2008). Pp 16.
moral hazard and perhaps reduce the
2. Ibid. Pp. 17
accountability and independence of
References
business line managers, but it also
Aragonés J. R.,. C. Blanco and K. Dowd 2001. “Incorporating Stress Tests into
Market Risk Modelling”. Derivatives Quarterly, Spring: 44 – 49.
ensures that the senior management
Dowd, K. 2005. “Measuring Market Risk” Second edition: Chichester and
is aware of the impact of extreme
New York: John Wiley and Sons.
events in a particular market or busi-
Supervisors Group. 2008. Observations on Risk Management Practices
ness area into the whole firm. during the Recent Market Turbulence, March 6.
Climate Change & Business
Climate Change & Business
21-22 October 2008, Kiev, Ukraine
Hyatt Regency Hotel, St. Sophia
21-22 October 2008, Kiev, Ukraine
Hyatt Regency Hotel, St. Sophia
Climate Change & Business
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