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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Risk Management in Banks: lessons learned from the recent financial crises and future challenges |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 104 |
| Date | 2014 |
| Abstract Text | Executive Summary After the recent global financial crisis risk management has been blamed for having failed to anticipate and hedge that disaster. Quantitative risk models as well as qualitative judgments of risk managers have been called into question. This master thesis aims exactly at identifying the main shortfalls of risk management practices, eventually providing related suggestions for the future. In order to fulfil this aim, risk management developments are first studied from an historical point of view, more precisely during episodes of banking crises of the past. Then, a careful explanation of how risk management operates in every day life is provided and finally it is analysed the current banking regulation that affects banks’ risk management (Basel III). From the overall analysis it turns out that risk management gained importance only starting from the 1980s. For instance, during the Great Depression no risk management tool was available to banks and this surely contributed to exacerbate the crisis. As the years have gone by, banks started using CAPM model for portfolio choice and Black-Scholes- Merton’s model for pricing options. Nevertheless, during the “big five” crises a weak risk management of banks was always a factor blamed to have contributed causing them. Despite the improvements of risk assessments that followed, risk management had responsibilities even in the last global financial crisis. Indeed, due to complexity of new financial products, models in place were not able to compute the exact risk embedded in financial markets. Furthermore, by looking at current risk management practices it turns out that the existing models used for assessing risks nowadays carry some shortfalls too. Therefore, in order to ensure the financial stability of banks some improvements need to be implemented. For instance, risk management need to use more forward-looking measures of risk. Many quantitative models are in fact still based on historical data, thus being not able to account for tail events or extreme different future scenarios. Stress testing and scenario analysis are valuable alternatives to such mere quantitative risk models. However, they should be implemented at an integrated level and by setting multi-factor scenarios sufficiently extreme to be able to account for tail events. Furthermore, when testing scenarios it is important to account for the possibility of new risks in financial markets. Indeed, risks are in continuous evolution as well as their interdependencies and must be carefully controlled if we aim at avoiding the next financial crisis. |
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