Risk Management

This is an MBA level course on Risk Management for financial institutions. The quantitative level is commensurate with that and presumes a working knowledge of basic probability and statistics.

The course is focused on risk analytics: the application of math, probability and statistics, and finance theory to identify, measure, and manage the major types of risks within financial institutions.

This requires that we also discuss, as background, such topics as markets, products, processes and systems, law and regulation, and basic economics. The measurement of financial risk also requires an examination and understanding of the causes and consequences of systemic financial crises and the associated very large losses at some financial institution that have occurred in the past.

The course will be a mixture of theory and practice, with a focus on how large banks actually measure, limit, and manage their financial risks. The emphasis will be on broad concepts and principles, with many examples given in non-graded homework problems.

The lectures will be supplemented by reading material that examines topics in more depth than will be possible to discuss during class time. We will begin by examining the nature of, and the methods for measuring each major risk type.

During the latter part of the course, we will discuss methods, such as economic capital (EC) and stress testing, for measuring firm-wide risk, both within each risk type and across all risk types.

EC is one of the tools used to assess the capital adequacy of a financial institution and for evaluating the return on capital of different lines of businesses, products, and customer relationships.

We will discuss the relation between risk and capital adequacy from an internal and a regulatory perspective. We will discuss the major types of regulatory capital constraints (e.g. Basel capital ratios, leverage ratios, the US CCAR process) and investigate the effect of regulatory capital constraints on a bank’s business strategy, in the context of the bank’s need to optimize its long-term return on capital.

The large growth, after the 2008 financial crisis, in regulatory capital requirements and other regulatory constraints has materially affected the business strategies of large banks and, consequently, has changed the landscape of the financial service industry.

The course should be of interest and value to anyone who plans to work in the financial service industry in functions such as: sales and trading, investment banking, commercial and retail banking, as well risk management.