Risk Management and Regulation
Departmental Papers, August 1, 2018
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Bibliographic details
- Authors: Tobias Adrian
- Published: August 1, 2018
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9781484343913.087
Evolution of risk management
- The evolution of risk management resulted from the interplay of financial crises, risk management practices, and regulatory actions.
- In the 1970s, research laid the intellectual foundations for the risk management practices that were systematically implemented in the 1980s as bond trading revolutionized Wall Street.
- Quants developed dynamic hedging, Value-at-Risk, and credit risk models based on the insights of financial economics.
- In parallel, the Basel I framework created a level playing field among banks across countries.
- Following the 1987 stock market crash, the near failure of Salomon Brothers, and the failure of Drexel Burnham Lambert, in 1996 the Basel Committee on Banking Supervision published the Market Risk Amendment to the Basel I Capital Accord; the amendment went into effect in 1998.
- The Market Risk Amendment led to a migration of bank risk management practices toward market risk regulations.
- The framework was further developed in the Basel II Accord, which, from the very beginning, was labeled as being procyclical due to the reliance of capital requirements on contemporaneous volatility estimates.
- The failure to measure and manage risk adequately can be viewed as a key contributor to the 2008 global financial crisis.
Subsequent regulatory innovations and practices
- Regulatory innovations have dominated subsequent risk management practices, including:
- capital and liquidity stress testing
- macroprudential surcharges
- resolution regimes
- countercyclical capital requirements
Summary findings
- Historical research and quantitative methods in the 1970s–1980s underpinned modern risk management tools such as dynamic hedging, Value-at-Risk, and credit risk models.
- Basel I established cross-country baseline capital rules; Market Risk Amendment (published 1996, effective 1998) shifted focus toward market risk regulation.
- Basel II attracted criticism as procyclical because it tied capital requirements to contemporaneous volatility estimates.
- Inadequate risk measurement and management was a key contributor to the 2008 global financial crisis.
- Post-crisis risk management is characterized by regulatory-driven measures focused on capital, liquidity, macroprudential tools, and resolution mechanisms.
Subjects and keywords
- Subjects: Banking, CDOs, Credit risk, Financial institutions, Financial regulation and supervision, Loans, Market risk, Securities
- Keywords: capital framework, capital requirement, CDOs, CDS market, Chase Manhattan risk-adjusted capital, Credit risk, DP, DPPP, financial system, Global, Loans, managing market risk, market infrastructure, Market risk, market risk rule, portfolio model, repo market capacity, risk manager, risk measurement, risk weight, Securities, securitization risk exposure
Tobias Adrian. "Risk Management and Regulation", Departmental Papers 2018, 014 (2018), accessed 9/16/2026, https://doi.org/10.5089/9781484343913.087
Content in this bundle
- Risk Management and Regulation; IMF Departmental paper 18/13; July 2018