Innovative Methods in Financial Risk Management

Innovative Methods in Financial Risk Management

Ozge Doguc (Istanbul Medipol University, Turkey)
DOI: 10.4018/978-1-5225-7180-3.ch008

Abstract

The regulations that emerged from the global financial crisis of 2008 and fines that were imposed afterwards triggered a wave of changes in how risk is managed. Innovative methods for risk management became more important as the standards for compliance and management tightened. Institutions also invested in strengthening their risk cultures and involved their boards more closely in key risk decisions. This chapter discusses major risk factors for financial institutions and the innovative solutions that they introduced to manage risk better. Innovative solutions in risk management are not limited to advances in technology such as machine learning and data mining, but also include new regulations, better monitoring, and stricter auditing. Financial institutions improved boards' oversight of risk, created new committees for risk assessment and monitoring. and developed new methodologies for risk management.
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Literature Survey

(Daianu & Lungu, 2008) considered the factors that are responsible for the failure in the financial markets, and eventually contributed to the economic crisis in 2008. Newly created complex financial products; inappropriate regulations in the financial markets; and poor risk management practices at financial institutions are among these factors. (Stultz, 2008) mentions about five major factors that led to the collapse of the risk management and assessment systems in major financial institutions. Some of those factors are using inappropriate risk metrics, lack of communication of risks and transparency with the top management and failure to use risk assessment and monitoring systems. Both (Stultz, 2008) and (Daianu & Lungu, 2008) recommends an Integrated Risk Management (IRM) system for financial institutions where all risk results are accumulated in a coordinated framework.

Key Terms in this Chapter

ML: Machine learning.

Dodd-Frank: Dodd-Frank Wall Street Reform and Consumer Protection Act.

BCBS 239: Basel Committee on Banking Supervision, standard number 239. It contains 14 principles aimed at strengthening risk data aggregation and reporting that touch upon key areas of systemically important banks.

AML: Anti-money laundering.

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