Late October 2012 saw an RMA conference on risk management in Dallas, the annual FIA conference in Chicago, and a catastrophic natural disaster in and around New York. While these were separate events with very different impact levels, all three were connected by the complexity of modern risk management, what it means, and how its outputs can be understood and used.
Conversation at the Risk Management Association event in Dallas was focused largely on developing, implementing and managing a risk appetite within a financial institution. This was tackled from multiple angles, including liquidity risk, market risk and credit risk. The recurring theme of the discussions was the difficulty in developing a framework that works both top-down from an enterprise-wide risk tolerance perspective, and bottom-up from an individual risk contributor’s perspective.
Risk appetite definitions ranged across benchmarked “active” risk budgeting (VaR against benchmarks), economic capital, collateral and funding costs, VaR and VaR shortfall. As has been noted before, it is interesting that in the aftermath of a financial crisis that saw VaR receive critical attention, its use is expanding into bilateral calculation of collateral and central clearing margins.