Risk Management Technology in Financial Services (eBook)

Front Cover 1
Risk Management Technology in Financial Services 4
Copyright Page 5
Table of Contents 6
Foreword 10
Preface 12
PART 1 Innovation, risk and return 14
Chapter 1 Innovation in finance 16
1.1 Financial systems and innovation 16
1.2 Laboratories for brilliant new ideas 18
1.3 Challenging the obvious 20
1.4 Strategic choices and unintended consequences 23
1.5 Salient problems and management decisions 25
1.6 Business leadership 29
1.7 Information technology. Does it really matter? 31
Chapter 2 What is meant by risk management? 37
2.1 Risk and risk factors 37
2.2 Risk management 40
2.3 Types of risk and their transparency 43
2.4 Board of directors and risk organization 46
2.5 Internal control. The feedback channel 48
2.6 Auditing and risk management 52
Chapter 3 Complexity of risk control with derivatives 56
3.1 Derivatives defined 56
3.2 Derivatives exposure 58
3.3 $110 trillion in notional principal amount 60
3.4 Derivative instruments for credit risk transfer 63
3.5 Proactive risk management 66
3.6 Levels of inspection, demodulation and stress testing 68
3.7 Effective management control starts at the top 70
Chapter 4 Integrating risk management through an enterprise architecture 73
4.1 Choosing a risk-based architecture 73
4.2 Funding tactics. An enterprise risk management application 77
4.3 Developing an integrated risk management system 79
4.4 End-to-end architectural solutions 82
4.5 Integrating stress testing into enterprise risk management 85
4.6 The importance of the human component should never be underrated 88
Chapter 5 Case studies on big product problems that went unattended 93
5.1 The role of character in the control of risk 93
5.2 British Petroleum. Pipeline risk 95
5.3 Telecom Italia. Political risk 97
5.4 Ford and General Motors. Management risk 99
5.5 EADS. Management risk European style 102
5.6 The product problems of Long-Term Capital Management 105
5.7 Legal risk embedded in financial products 108
PART 2 Risk control methodology and advanced models 112
Chapter 6 A methodology for risk management 114
6.1 The sense of having a methodology 114
6.2 Applying the physicist’s method 117
6.3 Dissent, negation and reconstruction 119
6.4 Credit risk methodology. A practical example 122
6.5 A methodology for integrated risk control 125
6.6 Organization and structure for risk management 128
Chapter 7 The contribution of models to experimentation 132
7.1 Introduction 132
7.2 The development of mathematical science 135
7.3 Abstraction, analysis, signs and rules 137
7.4 Notion of a mathematical system 141
7.5 Modelling discipline and analytics 144
7.6 From classical testing to stress testing 147
7.7 Anomalies and asymmetries 149
Chapter 8 Simulation 152
8.1 Introduction 152
8.2 The art of simulation 155
8.3 The Monte Carlo method 158
8.4 Practical applications of Monte Carlo 161
8.5 Simulation studies and system engineering 165
8.6 Simulation’s deliverables 168
Chapter 9 Using knowledge engineering for risk control 171
9.1 Knowledge engineering, object knowledge and metaknowledge 171
9.2 Errors and uncertainty can be both friend and foe 175
9.3 Uncertainty modelling and risk control 179
9.4 Inference systems, possibility theory and fuzzy engineering 182
9.5 Using fuzzy engineering with unexpected risks 185
9.6 Algorithmic additivity. A case study on budgeting 187
Chapter 10 Optimization through genetic algorithms 192
10.1 Concepts underpinning genetic algorithms 192
10.2 Optimization 194
10.3 Stochastic evolutionary processes in GA 197
10.4 The importance of fitness functions 200
10.5 Processes of becoming and termination 202
10.6 Implementing a GA procedure 204
10.7 Polyvalent GA applications and their deliverables 209
Chapter 11 Testing, backtesting, post-mortems and experimental methodology 212
11.1 Concepts underpinning a testing methodology 212
11.2 The art of model testing. The case of insight 214
11.3 Cultural change necessary for backtesting 217
11.4 Top management’s responsibility in testing a financial model 220
11.5 Post-mortems, experimentation and war games 224
11.6 The Committee on the Global Financial System, on stress testing 227
11.7 Using experimental design in evaluating test results 229
11.8 Benefits to be obtained through experimental design 231
PART 3 Increasing the effectiveness of information systems support 234
Chapter 12 Adding value to risk control through IT and organization 236
12.1 Strategic planning and information technology 236
12.2 Customer-centric solutions are an IT priority 239
12.3 Promoting the role of technology in controlling exposure 243
12.4 Real-time IT solutions for senior executives 246
12.5 A real-time system for risk management 249
12.6 Macroengineering. The macroscopic view 251
Chapter 13 Technology for time management, high frequency financial data and high impact events 255
13.1 Knowledge workers, high tech tools and business time 255
13.2 High frequency financial data 257
13.3 The analysis of high frequency data 260
13.4 A research method for high frequency data 263
13.5 Accounting for high frequency and low frequency events 266
13.6 Prerequisites to a study of high frequency events 268
Chapter 14 Project management for IT and risk control 271
14.1 Planning for project management 271
14.2 Principles of sound project management 274
14.3 The project’s life cycle 276
14.4 Design of a risk control project 278
14.5 Potential exposure, actual exposure and future exposure 281
14.6 Overdue, overbudgeted, overstressed and over here 284
Chapter 15 Implementing design reviews 288
15.1 Design reviews defined 288
15.2 Examples with design reviews of IT projects 291
15.3 Defects removal through design reviews 294
15.4 Implementing a formal design review 297
15.5 Learning from DR experience of other firms 299
15.6 Highlights of structured design review meetings 301
Chapter 16 Quality, reliability and availability 305
16.1 Technology risk can cost billions 305
16.2 Quality of service 307
16.3 Introduction to quality inspection 309
16.4 Developing a quality inspection system 313
16.5 System reliability 316
16.6 Quality of service and reliability correlate 319
16.7 Reliability and availability algorithms 321
Chapter 17 Being in charge of IT costs 326
17.1 Effective cost control of information technology 326
17.2 Targeting cost-effectiveness 329
17.3 Charging for computers and communications services 331
17.4 Outsourcing information technology 334
17.5 Know what you want in outsourcing 336
17.6 The art of negotiating 338
17.7 Measuring return on IT investments 341
Index 344