A Risk Professional s Survival Guide E-Book

Clifford Rossi

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 830

Veröffentlichungsjahr: 2014

Beschreibung

Balanced, practical risk management for post - financial crisis institutions 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.

Leseprobe

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A Risk Professional’s Survival Guide

Applied Best Practices in Risk Management

CLIFFORD ROSSI

Cover image: top: ©iStock.com/blackred;           bottom: ©iStock.com/George Pchemyan

Cover design: Wiley

Copyright © 2014 by Clifford Rossi. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Rossi, Clifford.     A risk professional’s survival guide : applied best practices in risk management / Clifford Rossi.        pages cm. — (Wiley finance)     Includes index.     ISBN 978-1-118-04595-4 (cloth); ISBN 978-1-118-92237-8 (ebk); ISBN 978-1-118-95304-4 (ebk)     1. Risk management. I. Title.     HD61.R667 2014     658.15′5—dc23

2014016949

To Linda; with this adventure astern, may calm winds carry us toward new horizons.

Contents

Preface

Acknowledgments

About the Author

CHAPTER 1 Navigating Risk at SifiBank

Overview

Financial Intermediation and Profit Maximization

SifiBank Structure and History

SifiBank Organizational Structure and Oversight Governance

Bank Regulatory Landscape

Summary

Questions

Notes

CHAPTER 2 Overview of Financial Risk Management

Risk Management Defined

Elements of Risk Management

Risk Identification and Typology

Risk Measurement

Risk Analysis

Risk Mitigation

Summary

Questions

CHAPTER 3 Risk Governance and Structure

SifiBank’s Risk Governance—The Early Years

Prescriptions for Strong Risk Governance

Questions

Notes

CHAPTER 4 Economic Capital, Risk-Adjusted Performance, and Capital Allocation

SifiBank’s Business Problem

Economic Capital and Value-at-Risk

Stress Testing and Scenario Analysis

Risk-Adjusted Performance Measurement

Risk-Adjusted Performance Optimization

Summary

Questions

Notes

CHAPTER 5 Credit Risk Theory

Overview

Portfolio Credit Risk Dynamics

Analytic Methods for Credit Portfolio Assessment

Counterparty Risk

Summary

Questions

Notes

CHAPTER 6 Consumer Credit Risk Measurement

Overview

Measuring Product Expected Loss

Incorporating Borrower Options Into Risk Views and Competing Risk Assessment

Loss Severity

Generating Credit Loss Estimates

Loan Loss Reserving and Forecasting

Unexpected Loss

Summary

Questions

Notes

CHAPTER 7 Commercial Credit Risk Overview

SifiCommercial Lending Division

Developing Risk Ratings

Risk-Rating Scorecard Process

Loan Review Process

Rating CRE Loans

Commercial Loan Syndication

Summary

Questions

CHAPTER 8 Credit Risk Mitigation

Overview

Insurance Contracts

Credit Derivatives and Risk Mitigation

Credit Default Swap Mechanics

Credit-Linked Note Mechanics

Collateralized Debt Obligation Mechanics

Credit Hedging Outcomes

Summary

Questions

CHAPTER 9 Interest Rate Risk

Overview of SifiBank’s Interest Rate Risk Exposure

Principal Components Analysis

Analytic VaR Measurement of Interest Rate Risk

Monte Carlo VaR Interest Rate Risk Methods

Modeling Interest Rate Risk of More Complex Instruments

Summary

Questions

Notes

CHAPTER 10 Market Risk

Calculating VaR for a Portfolio

Simulation Analysis and VaR

Position Limits Policies

VaR Limitations and Issues

Summary

Questions

CHAPTER 11 Liquidity Risk Management

SifiBank’s Exposure to Liquidity Risk

SifiBank’s Approach to Liquidity Risk Management

Stress Testing the Liquidity Profile

Liquidity Contingency Planning

Liquidity Measurement

Summary

Questions

Notes

CHAPTER 12 Market Risk Hedging

Overview

Hedging Principles and Basics

Hedging Using Futures Contracts

Rolling Hedges and Risks

Hedging Using Options

Delta Hedging

Summary

Questions

Notes

CHAPTER 13 Hedging Interest Rate Risk

Overview

Hedge Instrument Alternatives

Summary

Questions

Note

CHAPTER 14 Operational Risk Management

Overview

Internal Controls Assessment

Quantitative Assessment of Operational Risk

Regulatory Standards

Cyber-Security Risk

Summary

Questions

Notes

CHAPTER 15 Model, Regulatory, Legal, and Reputational Risk Management

Overview

Model Risk

Data Errors

Model Assumptions

Risk Layering

Guarding against Model Risk

Regulatory Risk

Legal Risk

Reputation Risk

Summary

Questions

Note

CHAPTER 16 Toward Integrated Risk Management

Overview

Defining Integrated Risk Management

Key Risk Integration Points

Aligning Risk Infrastructure with Risk-Taking

Summary

Questions

Answer Key

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

Chapter 16

Index

End User License Agreement

List of Tables

Chapter 1

Table 1.1

Table 1.2

Table 1.3

Chapter 2

Table 2.1

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 4.8

Table 4.9

Table 4.10

Table 4.11

Table 4.12

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Table 5.6

Table 5.7

Table 5.8

Table 5.9

Table 5.10

Table 5.11

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Table 6.5

Table 6.6

Table 6.7

Table 6.8

Table 6.9

Table 6.10

Table 6.11

Table 6.12

Table 6.13

Table 6.14

Table 6.15

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 7.6

Table 7.7

Table 7.8

Table 7.9

Table 7.10

Table 7.11

Table 7.12

Chapter 8

Table 8.1

Table 8.2

Table 8.3

Table 8.4

Table 8.5

Table 8.6

Table 8.7

Table 8.8

Table 8.9

Table 8.10

Chapter 9

Table 9.1

Table 9.2

Table 9.3

Table 9.4

Table 9.5

Table 9.6

Table 9.7

Table 9.8

Table 9.9

Table 9.10

Chapter 10

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Table 10.5

Table 10.6

Table 10.7

Table 10.8

Table 10.9

Table 10.10

Chapter 11

Table 11.1

Table 11.2

Table 11.3

Table 11.4

Table 11.5

Table 11.6

Table 11.7

Chapter 12

Table 12.1

Table 12.2

Table 12.3

Table 12.4

Table 12.5

Chapter 13

Table 13.1

Table 13.2

Table 13.3

Table 13.4

Table 13.5

Table 13.6

Table 13.7

Table 13.8

Table 13.9

Table 13.10

Table 13.11

Table 13.12

Table 13.13

Table 13.14

Table 13.15

Table 13.16

Table 13.17

Table 13.18

Table 13.19

Chapter 14

Table 14.1

Table 14.2

Table 14.3

Table 14.4

Table 14.5A

Table 14.5B

Table 14.5C

Table 14.6

Table 14.7

Table 14.8

Table 14.9

Table 14.10

List of Illustrations

Chapter 1

Figure 1.1

Risk Management Feedback Loop

Figure 1.2

SifiBank Corporate Structure

Figure 1.3

Bank Net Income over Time

Figure 1.4

Bank Net Interest Margins Over Time

Figure 1.5

Bank Trends in Credit Performance

Chapter 2

Figure 2.1

Standard Normal Distribution and Area Under the Curve

Figure 2.2

Situational Risk Management Framework

Figure 2.3

Historical U.S. House Price Trends

Figure 2.4

Risk Data Warehouse Components

Chapter 3

Figure 3.1

Cognitive Bias Effects on Management Loss Aversion

Figure 3.2

Effects of Weak Corporate Governance and Risk Infrastructure on Loss Aversion

Figure 3.3

Effect of Using Risk-Adjusted Performance Metrics on Loss Aversion

Chapter 4

Figure 4.1

Illustrative Gain/Loss Distribution for SifiInvestment Bank Portfolio

Figure 4.2

Standard Normal Distribution

Figure 4.3

SifiBank Economic Capital Aggregation by Business Unit and Risk Type

Figure 4.4

Conceptual Mapping of a Non-Normally Distributed Variable

X

to a Standard Normally Distributed Variable

Y

Figure 4.5

SifiMortgage Credit Loss Stress Test Relationships

Figure 4.6

Alternative Stress Tests for SifiMortgage

Figure 4.7

SifiMortgage Stress Tests Mapped to External Risk Ratings

Figure 4.8

Reverse Stress Testing Example Leveraging Economic Capital Analysis

Figure 4.9

SifiMortgage Reverse Stress Test Outcomes

Figure 4.10

Conceptual SIBTD RaRoC-VaR Efficient Frontier

Chapter 5

Figure 5.1

Call Option Profit Diagrams

Figure 5.2

Put Option Profit Diagrams

Figure 5.3

Cumulative Probability Distribution

Figure 5.4

Distance-to-Default

Figure 5.5

Simple One-Year Transition-State Model

Figure 5.6

SifiMortgage CDO Portfolio Risk Limits and Asset Risk

Figure 5.7

Default Distributions Derived from the Vasicek Default Model

Chapter 6

Figure 6.1

U.S. Commercial Bank Loan Composition

Figure 6.2

CPG 90+DPD Vintage Curves 2001–2003

Figure 6.3

Illustrative Logistic Function

Figure 6.4

Frequency of Defaults

Figure 6.5

Competing Risks between Default and Prepayment for a Mortgage

Figure 6.6

Return Maximization

Figure 6.7

SifiMortgage ALLL Trends

Figure 6.8

ALLL and Loan Loss Provision Trends, 2000–2010

Figure 6.9

Home Price Simulation and Default Distribution

Figure 6.10

Illustration of Credit VaR

Chapter 7

Figure 7.1

SifiCommercial Risk Ratings Distribution

Figure 7.2

Conceptual Depiction of Obligor Cash Flow at Risk

Chapter 8

Figure 8.1

SifiMortgage Held-for-Investment Mortgage Portfolio Credit Losses versus Loan Level Insurance Coverage

Figure 8.2

Pool Insurance Example

Figure 8.3

Prime FR30 CDI Credit Default Swap Contract for SifiMortgage as Buyer

Figure 8.4

CLN Issued by SifiBank Using Prime Jumbo Portfolio as Reference Asset

Figure 8.5

Illustrative CDO Structure

Figure 8.6

Cumulative Default Rates and Expectations for 2005 SifiMortgage Originations

Chapter 9

Figure 9.1

Impact of Duration and Convexity on Bond Price

Figure 9.2

10-Year Adjusted Key Rates Compared to Original Spot Curve

Figure 9.3

Variance-Covariance Matrix for Principal Components Analysis

Figure 9.4

Effect of Parallel Shift, Change in Slope, and Curvature on Yield Curve

Figure 9.5

Illustrative Short-Term Interest Rate Stochastic Process

Figure 9.6

SFID Bond Portfolio Value Cumulative Distribution and VaR

Figure 9.7

Standard Bond Value Compared to Mortgage Value with Embedded Call Option

Figure 9.8

Mortgage Principal and Interest Allocation

Figure 9.9

Prepayment Schedule for 100, 125, and 75 Percent CPR Scenarios

Chapter 10

Figure 10.1

Decomposing a Stochastic Process

Figure 10.2

Lognormally Distributed Stock Prices Generated by a Stochastic Process

Figure 10.3

Change in Overall TSD Portfolio Value

Figure 10.4

Fat-Tailed Risk and VaR Estimates

Chapter 11

Figure 11.1

Continuum of Financial Asset Liquidity

Figure 11.2

Financial Liabilities Credit and Rate Sensitivity Matrix

Figure 11.3

Simple 30-Day Static Maturity Ladder

Figure 11.4

Hypothetical Retention Rate

Figure 11.5

Shape of “Refi” Equation

Figure 11.6

Liquidity-at-Risk Concept

Chapter 12

Figure 12.1

TSD 24-Day VaR Trends

Figure 12.2

Futures Contract to Hedge JPM Long Position

Figure 12.3

Weekly JPM Spot Price and Three-Month Citigroup Futures Price Relationship

Figure 12.4

Regression Output for JPM and Citigroup Stock Price Analysis

Figure 12.5

Stock Price Time Series and

Estimation

Figure 12.6

Rolling versus Stack and Roll Hedge

Figure 12.7

TSD Hedge of JPM Stock Using Purchased Put Options

Figure 12.8

TSD Hedge of JPM Stock Using Purchased Put Options at Lower Strike Price

Figure 12.9

Call Bear Spread Hedge Strategy

Figure 12.10

Spread Position and Combined Position for JPM Portfolio for $46 Strike Call

Figure 12.11

Combined Positions for Call Bear Spreads at Strike Prices of $46 and $48

Figure 12.12

Purchased Collar to Hedge JPM Stock Portfolio

Figure 12.13

Purchased Collar, Long Position, and Combined Outcome

Figure 12.14

Delta, Delta-Gamma Approximations Compared to Fair Option Pricing

Chapter 13

Figure 13.1

SifiMortgage Mortgage Loan Lifecycle

Figure 13.2

Borrower Rate Commitment as Put Option

Figure 13.3

Treasury and Fannie Mae MBS Pricing Relationships

Figure 13.4

Short MBS Futures Hedge and Long Mortgage Position

Figure 13.5

Borrower Put Delta

Figure 13.6

Put-Call Parity Relationships

Figure 13.7

Synthetic Purchased Put Creation Leveraging Put-Call Parity

Figure 13.8

Short Forward and Fallout Adjusted Long Commitments Gain/Loss

Figure 13.9

Net Position from Long Commitments and Short Forwards

Chapter 14

Figure 14.1

How Operational Processes Affect Credit Risk

Figure 14.2

Distribution of Internal Fraud Losses at SifiMortgage

Figure 14.3

Histogram of SifiMortgage Mortgage Fraud Losses

Chapter 15

Figure 15.1

Type I and Type II Model Errors

Figure 15.2

Type I and Type II Error Trade-Offs in Risk Models

Figure 15.3

How Data Errors Contribute to Model Errors

Figure 15.4

Impact of Changing in Correlation Structure on Stress Loss Events

Figure 15.5

Representative Model Diagnostics for SifiMortgage Mortgage Scorecard

Figure 15.6

SifiMortgage Error Tracking Analysis

Figure 15.7

High-Risk Loan Monitoring

Figure 15.8

SifiBank Sentiment Analysis Dashboard

Figure 15.9

SifiBank Sentiment Analysis: Number of Positive and Negative “Hits” and Peer Comparisons

Chapter 16

Figure 16.1

SifiMortgage Credit Policy Matrix

Figure 16.2

SifiBank Risk Infrastructure/Risk Exposure Matrix

Figure 16.3

Risk Management Scorecard

Figure 16.4

SifiBank Consumer Lending Division RMS Scorecard

Figure 16.5

RMS Scorecard Results across Business Units and Risks

Figure 16.6

RMS Scorecard Trends and Benchmarking

Guide

Cover

Table of Contents

Preface

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Preface

The intent of this book is to provide the next generation of risk leaders, as well as current practitioners of financial risk management, a handy reference of techniques and concepts for identifying, measuring, and mitigating the major risks facing financial institutions. Risk management has evolved over the past decade into a highly quantitative field, drawing on increasingly complex mathematical and statistical concepts to portray a variety of traditional risks such as credit, counterparty, market, and interest rate risk. At the same time, the financial crisis of 2008–2009 laid bare the limitations of sophisticated quantitative analysis. Advances in quantitative risk management will continue; however, risk managers must be mindful of the “art” of risk management, namely judgment and experience that augments the “science” of risk management. Many risk management books focus on the quantitative aspects of the field rather than explore the importance of the qualitative side of risk management. This book is an attempt to bring both perspectives together in a cohesive fashion.

Another feature of this book is to provide readers with a framework for thinking about risk not as a singular outcome, but one that has consequences that may ripple across other parts of the business or risks. Leveraging experience from the crisis and afterward, the book follows the events of SifiBank, a stylized significantly important financial institution that provides the common thread of risk management practices throughout the course of the book. In that regard, this book represents a significant departure from other risk management books in that it is effectively a case study of one large complex commercial bank. To bring that story alive, a synthetic balance sheet is constructed within which specific positions, portfolios and loans are created. This information is then used in a series of Excel/VBA workbooks to provide the reader a hands on companion to the text discussion of key concepts and models.

The structure of the book starts by providing background on SifiBank, an imaginary institution that serves as an example throughout the chapters, and its historical roots, organizational and regulatory structure, competitive landscape, and markets. The reader is then guided through a risk taxonomy and governance discussion followed by a chapter introducing the reader to value-at-risk (VaR) and risk-adjusted performance metrics in light of the importance of such metrics for measuring a broad variety of risks.

Following these foundational chapters, the book delves into specific risk types, with an emphasis on identifying and measuring risk. Following each risk the reader is introduced to techniques and structures for mitigating major risk types. The book also presents chapters on operational, model, regulatory, reputation, and legal risk, all of which are of increasing importance for financial institutions following the financial crisis. Finally, the book ends with a look at integrated risk management and how risk managers should be thinking holistically across risks and the firm in performing their risk assessment.

The book is designed for a variety of readers. Readers with technical backgrounds will be able to delve into details surrounding a number of key quantitative concepts and techniques such as Monte Carlo simulation, Principal Components Analysis, copula methods, and econometric models for estimating default risk, to name a few. The Excel/VBA workbooks will be useful to such readers to reinforce concepts and allow sensitivity analysis to be performed. At the same time, readers with an interest in obtaining a basic understanding of key concepts rather than implementing risk models can review the chapter discussion to gain an overall understanding of a particular risk issue.

At the university level, the book is targeted to advanced undergraduate or graduate students in risk management, business, finance, and insurance. The book provides material for a semester long course in financial risk management or bank management or can be easily adapted for a two-course sequence. End of chapter questions provide students an opportunity to test their understanding of important concepts covered and the Test Bank provided to instructors contains ready-made examinations that can be used directly in class. Further, a set of comprehensive PowerPoint instruction slides is provided for each chapter, tying directly to the material discussed in the chapter. Instructors are invited to visit www.wiley.com for additional materials.

As a former senior risk executive at several large financial institutions, my staff and I were always looking for useful references on risk management that could help us improve our understanding of applied risk management concepts and methodologies. In that spirit, this book is meant to fill a gap in this field that provides a comprehensive applied reference for risk managers, now and in the future.

Acknowledgments

While my name appears on the cover of this book, this project could not have been completed without the direct and indirect support from a number of people critical to the process. First, and foremost, Jim Thompson, a colleague of mine from a former workplace is credited with putting together the Excel/VBA workbooks contained in this book. Jim’s exceptional work, particularly evidenced in the Market Risk, Interest Rate Risk, and Consumer Credit Risk chapters provides readers with user-friendly tools, allowing them to test highly complex risk methodologies easily. These Excel tools bring the story of SifiBank alive and without this material the utility of this book would be severely limited.

Linda Rossi, my wife, not only endured the writing and editing process, but also volunteered her time to take on the role of project manager and jack-of-all-trades in manuscript preparation and version control. Without her assistance and moral support throughout the project, this process would have been significantly more difficult for me.

Finally, a number of people have provided reviews and support along this path. Professor Larry Gordon, from the Robert H. Smith School of Business, University of Maryland, provided guidance and insight on the book-writing process from his own experience, motivating me to take on this project. Likewise, Dean Alex Triantis, Robert H. Smith School of Business, University of Maryland, provided support and an introduction to Bill Falloon at John Wiley & Sons. Bill’s support of the concept for the book provided the catalyst for it to become something more than just an idea. Thanks also go out to Meg Freeborn and Vincent Nordhaus whose editorial skills greatly enhanced the end product while keeping me on schedule. Finally, I would like to thank the MS Finance students taking my Corporate Risk Management course at the Robert H. Smith School of Business, University of Maryland, who provided feedback and critical input on the materials during the project.

To all of you go my sincerest thanks for your patience and understanding. Your support enabled the book to come to fruition, and any remaining errors and omissions are solely my own.

About the Author

Dr. Rossi is Professor-of-the-Practice and Executive-in-Residence at the Robert H. Smith School of Business, University of Maryland. Prior to entering academia, Dr. Rossi had nearly 25 years’ experience in banking and government, having held senior executive roles in risk management at several of the largest financial services companies.

His most recent position was Managing Director and Chief Risk Officer for Citigroup’s Consumer Lending Group. He also served as Chief Credit Officer at Washington Mutual (WaMu) and as Managing Director and Chief Risk Officer at Countrywide Bank. Previous to these assignments, Dr. Rossi held senior risk management positions at Freddie Mac and Fannie Mae. He started his career during the thrift crisis at the U.S. Treasury’s Office of Domestic Finance and later at the Office of Thrift Supervision, working on key policy issues affecting depositories. Dr. Rossi was also an adjunct professor in the Finance Department at the Robert H. Smith School of Business for eight years and has numerous academic and nonacademic articles on banking industry topics. Dr. Rossi is frequently quoted on financial policy issues in major newspapers and has appeared on such programs as Fox News, Canada’s BNN, C-SPAN’s Washington Journal and CNN’s Situation Room. He also has a weekly column, Risk Doctor, in the American Banker on risk and regulatory reform issues. Dr. Rossi serves as an advisor to a number of banks, federal regulatory agencies, private equity investment companies, and hedge funds on banking and regulatory topics, and founded Chesapeake Risk Advisors, LLC, a financial risk management consulting practice. He received his PhD from Cornell University.

CHAPTER 1Navigating Risk at SifiBank

OVERVIEW

Managing risk at a banking institution is one of the most critical activities carried out by financial firms. Banks could not expect to have much longevity if risk management were ignored or poorly executed. The subprime mortgage crisis of 2008 offers a once-in-a-lifetime case study of how many different types of financial institutions lost sight of the importance of risk management and either went out of business, were forced to merge with healthier firms or had to take a bailout from U.S. taxpayers. And this was not a U.S. phenomenon limited to only the U.S. banking industry: The global financial sector during the 2008–2009 period was in virtual free fall with many experts fearing an economic depression on an unprecedented scale. While many causes have been attributed to the crisis—a number of gaps in regulation, a financial incentive structure that rewarded short-run profitability and production, the interconnectedness of banks and other financial entities comprising the so-called shadow banking sector—nevertheless, at the heart of the crisis was a fundamental lapse in risk management across a great swath of the industry. Particularly problematic was that the largest financial institutions were among the companies where risk management deficiencies were most acute. Given the scale and scope of these global financial behemoths, these gaps in risk management at the institution level would manifest as systemic risk and contribute to one of the worst financial calamities on a global scale. These institutions became the focus of intense scrutiny by regulators after the crisis and have been designated as , or for short.