[...]... Risk Management Total risk management, enterprisewide risk management, integrated risk management, and other terms are used for approaches that implement firmwide concepts including measurement and aggregation techniques for market, credit, and operational risks This book uses the following definition for total risk management, based on the understanding in the market regarding the concept: total risk. .. Maximized earnings potential Op era t risk Identification of risk al ion Measurement of risk Cre dit risk Linking risk and return tr rke isk Capital allocation process Ma Risk management sophistication Control of risk Development Levels of Different Risk Categories F I G U R E 1-4 Shareholder value objective 14 Strategic advantage Capital allocation techniques Value-based strategy Risk Management: A Maturing... years strategies, culture, and considerable technical and management know-how relating to risk management, which represents a competitive advantage against the manufacturing and insurance sectors 1.6 RISK MANAGEMENT: A MULTILAYERED TERM 1.6.1 Background As previously discussed, risk management is a shifting concept that has had different definitions and interpretations Risk management is basically a... 4.2.2 Operational Risk and Shareholder Value 288 4.3 Definition of Operational Risk 289 4.4 Regulatory Understanding of Operational Risk Definition 293 4.5 Enforcement of Operational Risk Management 296 4.6 Evolution of Operational Risk Initiatives 299 4.7 Measurement of Operational Risk 302 4.8 Core Elements of an Operational Risk Management Process 303 4.9 Alternative Operational Risk Management Approaches... financial institutions, and insurance companies to develop organizational structures and processes for the management of credit, market, and operational risk Risk management became a hot topic for many institutions, as a means of increasing shareholder value and demonstrating the willingness and capability of top management to handle this issue In most financial organizations, risk management is mainly... to Incorporate Market Risks 60 2.6.1 Scope and Coverage of Capital Charges 60 2.6.2 Countable Capital Components 61 2.6.3 The de Minimis Rule 62 The Standardized Measurement Method 62 2.7.1 General and Specific Risks for Equity- and Interest-Rate-Sensitive Instruments 65 2.7.2 Interest-Rate Risks 66 2.7.3 Equity Position Risk 79 2.7.4 Foreign-Exchange Risk 83 2.7.5 Commodities Risk 84 2.7.6 Treatment... managing the pure risks faced by individuals and institutions The concept of risk management evolved from corporate insurance management and has as its focal point the possibility of accidental losses to the assets and income of the organization Those who carry the responsibility for risk management (among whom the insurance case is only one example) are called risk managers The term risk management is... the chief risk officer and is limited, for the most part, to market risks The credit risk officer usually takes care of credit risk issues Both areas are supervised at the board level by separate competence and reporting lines and separate directives More and more instruments, strategies, and structured services have combined the profile characteristics of credit and market risk, but most management. .. operational risks 5 Operational risk Credit risk ment issues As a result, one problem is to understand how the different risk categories are defined, and what characteristics, assumptions, and conditions are connected to the terms used to describe them This allows us to understand the different natures of different types of risk And because risk has to be measured, measurement tools, methodologies, and so... objectives and improving financial performance by managing risks that have the largest potential impact Assessing risk in the aggregate to minimize surprises and reduce earnings fluctuations Fostering better decision making by establishing a common understanding of accepted risk levels and consistent monitoring of risks across business units Improving corporate governance with better risk management and reporting . class="bi x0 y0 w0 h0" alt="" RISK MANAGEMENT AND CAPITAL ADEQUACY Gallati_fm_1p_j.qxd 2/27/03 9:15 AM Page i This page intentionally left blank. RISK MANAGEMENT AND CAPITAL ADEQUACY RETO R. GALLATI McGraw-Hill New. Risk 285 4.2.1 Drivers of Operational Risk Management 286 4.2.2 Operational Risk and Shareholder Value 288 4.3 Definition of Operational Risk 289 4.4 Regulatory Understanding of Operational Risk. General and Specific Risks for Equity- and Interest-Rate-Sensitive Instruments 65 2.7.2 Interest-Rate Risks 66 2.7.3 Equity Position Risk 79 2.7.4 Foreign-Exchange Risk 83 2.7.5 Commodities Risk