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Daily Archives: March 27, 2012

Office of Financial Research – Forging Best Practices in Risk Management

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Office of Financial Research – Forging Best Practices in Risk Management, Mark J. Flannery, Paul Glasserman, David K.A. Mordecai, Cliff Rossi – March 26, 2012

  • “This paper approaches risk management from three perspectives: firm-level risk measurement, governance and incentives, and systemic concerns. These are three essential dimensions of best practices in risk management; although we discuss each dimension separately, they are interrelated. The paper begins with a brief review of salient changes and unmet challenges in risk measurement in the wake of the financial crisis. It proceeds with a discussion of the interplay between volatility regimes and the potential for risk amplification at a system-wide level through simultaneous risk mitigation at the individual firm level. Quantitative risk measurement cannot be effective without a sound corporate risk culture, so the paper then develops a model of governance that recognizes cognitive biases in managers. The model allows a comparison of the incentive effects of compensation contracts and leads to recommendations for improving risk management through improved contract design. The last section takes a
    systemic perspective on risk management. Risk managers must recognize important ways in which market dynamics deviate from simple, idealized models of hedging an individual firm’s exposures. Firms’ collective hedging, funding, and collateral arrangements can channel through the financial system in ways that amplify shocks. Understanding these effects requires an appreciation for the organization of trading operations within firms. The article concludes with a
    summary and recommendations.”

  • Related postings on the financial system

    • New GAO Reports – Export Controls, IT Supply Chain

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    Export Controls – Proposed Reforms Create Opportunities to Address Enforcement Challenges, GAO-12-246, Mar 27, 2012 IT Supply Chain – Additional Efforts Needed by National Security-Related Agencies to Address Risks, GAO-12-579T, Mar 27, 2012 Proliferation Security Initiative, Agencies Have Adopted Policies and Procedures but Steps Needed to Meet Reporting Requirement and to Measure Results, GAO-12-441, Mar… Continue Reading

    FHFA Announces New Conservatorship Scorecard for Fannie Mae and Freddie Mac; Reduces Executive Compensation

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    News release: “Federal Housing Finance Agency (FHFA) Acting Director Edward J. DeMarco today released a 2012 Conservatorship Scorecard, which provides the implementation roadmap for the new FHFA Strategic Plan announced in February 2012. The scorecard includes specific objectives and timetables for Fannie Mae and Freddie Mac (the Enterprises) in support of the Strategic Plan. FHFA… Continue Reading

    Congressional Oversight of Agency Public Communications: Implications of Agency New Media Use

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    CRS – Congressional Oversight of Agency Public Communications: Implications of Agency New Media Use. Kevin R. Kosar, Analyst in American National Government, March 14, 2012 “This report intends to assist Congress in its oversight of executive branch agencies’ public communications. Here, “public communications” refers to agency communications that are directed to the public. Many, and… Continue Reading

    The Mind is a Metaphor – by Brad Pasanek

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    “The Mind is a Metaphor, is an evolving work of reference, an ever more interactive, more solidly constructed collection of mental metaphorics. This collection of eighteenth-century metaphors of mind serves as the basis for a scholarly study of the metaphors and root-images appealed to by the novelists, poets, dramatists, essayists, philosophers, belle-lettrists, preachers, and pamphleteers… Continue Reading

    BizJournals On Numbers – private-sector employment levels from January 2012 against the same month in 2008

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    “On Numbers analyzed the latest data from the U.S. Bureau of Labor Statistics, matching private-sector employment levels from January 2012 against the same month in 2008. The comparison is especially relevant because the recession officially began in December 2007, just one month before the start of the study period. Texas and North Dakota are rarities.… Continue Reading