New Book, Managing Extreme Financial Risk, Showcases Fresh Approach to Ready Financial Institutions

September 19, 2013

NEW YORK--(BUSINESS WIRE)--Five years ago, a spark from the Lehman bankruptcy triggered a crisis of greater scope than any other the modern financial world had seen. Over the past 30 years, extreme crises seem to unfold every few years: the Continental Bank crisis in 1983-84, Black Monday in 1987, S&L’s in the early 1990s, LTCM and the Asian debt crisis in the late 1990s, the tech bubble in the early 2000s and the crisis of 2008. The computer and algorithm-driven market of today has only upped the stakes. It is bringing to the fore extremes of risk where losses can not only wipe away shareholder value, but also threaten the very foundations of our global financial system because of the interconnectivity of “too big to fail” institutions. How prepared are financial institutions to weather the next financial crisis?

Now, on the fifth anniversary of the 2008 crash, comes a book that provides financial institutions and regulators with a way to measure and make provisions for steering through times of radical turbulence, Managing Extreme Financial Risk: Strategies and Tactics for Going Concerns (Academic Press – ISBN 9780124172210 – Retail & e-book, $39.95).

In Managing Extreme Financial Risk, author Karamjeet Paul discusses inadequacies of the current approach and provides a logical and easy-to-comprehend exploration of extreme tail risk – the statistically improbable yet regularly occurring crises that have led to the failure or near-failure of institutions caught off guard. He emphasizes that the cost of being wrong in relation to extreme tail risk is not a simple loss of profits, but the possible demise of the institution itself.

Mr. Paul sets the stage by analyzing recent oversights, narrated firsthand by the executives who were embroiled in some of the institutional life-and-death dramas of previous crises, and then outlines solutions rendered in language that is equal parts clear economic primer, historical lessons and common sense. The message? A lack of proper and objective focus on measuring and quantifying extreme tail risk that – if not managed proactively – can spiral out of control to sink institutions and severely impact markets in a crisis.

Without algorithms, models and quants, the author clearly sets forth the basis for a new approach – “Sustainability Management” – for dealing with extreme tail risk to maintain going concerns. This approach, beyond traditional risk management, gives decision- and policy-makers, CEOs, CFOs, boards of directors and regulators a measure of the probable maximum loss (PML) for an institution at any given moment, one that can foster proactive intervention to help weather sudden financial crises, protect shareholder value, and reduce risk to the financial system.

Early reviews from experts:

"Karamjeet Paul makes a convincing case for addressing the fundamental issue of 'tail risk' to protect financial institutions and the financial system. Despite all the talk to 'do something' following the 2008 crisis, the impact of tail risk has not been addressed. Managing Extreme Financial Risk should be required reading for regulators, board members, CEOs and CFOs of large financial institutions." - Vashishta Bhaskar, Duquesne University

"When it comes to the tail risk, Mr. Paul encourages senior management to shelve quantitative models and address capital sustainability instead. The book has implications for market participants who work with such unknowns as 99.5%-iles of a deal or portfolio profit and loss distributions." - Sergei Esipov, Quant-Isle.

Book Reviews

Surviving the Next Financial Crisis: Book Review by Lawrence Baxter, William B McGuire Professor of the Practice of Law at Duke university

Financial Markets& Portfolio Management: Book Review by Simon Straumann of University of St. Gallen, St. Gallen Switzerland