Foreword
In many ways, a handbook that helps to contextualize the banking business as a portfolio of risk management activities could not be more welcome or timely. It should be no surprise that the globalization of the financial system has dramatically expanded the scope of risks a bank naturally accumulates in its day-to-day operations. Accordingly, the difficulty of valuing and administering these aggregate risks continues to broaden. Whilst computer technology has at least provided the processing faculty against this increasing challenge, the banking industry is continually pressed to develop the analytical theory and hedging tools necessary to cope with risk management’s increasing complexity. The advent and rapid growth of markets such as asset securitization and credit derivatives, for instance, evidence such progress. Hence, any practical study of banking without a proper perspective on the fundamental liquidity, capital, interest rate,, and credit risk management techniques in practice today would be incomplete.
With that said, the recent financial crisis has raised many questions around the merits of the so-called ‘advances’ made in valuation and risk theory over the past several decades. I would argue that ‘financial engineering’, as it has so dubiously been labelled, has taken a disproportionate share of the blame as the catalyst for the crisis. As above, the genesis of these new tools and approaches has been born out of necessity and are a natural consequence of the ...
