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Keywords:risk management 

Journal Article
Hedge funds, financial intermediation, and systemic risk

Hedge funds, with assets under management approaching an estimated $1.5 trillion in 2006, have become important players in the U.S. and global capital markets. These largely unregulated funds differ from other market participants in their use of a variety of complex trading strategies and instruments, in their liberal use of leverage, in their opacity to outsiders, and in their convex compensation structure. These differences can exacerbate potential market failures stemming from agency problems, externalities, and moral hazard. Counterparty credit risk management (CCRM) practices, used by ...
Economic Policy Review , Volume 13 , Issue Dec , Pages 1-18

Journal Article
The Gordon Gekko effect: the role of culture in the financial industry

Culture is a potent force in shaping individual and group behavior, yet it has received scant attention in the context of financial risk management and the 2007-09 financial crisis. This article presents a brief overview of the role of culture as it is seen by psychologists, sociologists, and economists, and then describes a specific framework for analyzing culture in the context of financial practices and institutions. Using this framework, the author addresses three questions: (1) what is culture? (2) does it matter? and (3) can it be changed? He illustrates the utility of this framework by ...
Economic Policy Review , Issue Aug , Pages 17-42

Journal Article
Corporate culture in banking

Until recently, regulatory discourse has paid scant attention to the issue of organizational culture in banking. Yet ethical lapses and systematic weaknesses exposed in the 2007-09 financial crisis suggest that future policy dialogue is unlikely to ignore culture?s significance. Drawing from an approach developed in organizational behavior research, the author introduces a framework for diagnosing and changing corporate culture in a way that more effectively supports the bank?s growth strategy and induces behavior that enhances financial stability. The normative exercise, highlighting the ...
Economic Policy Review , Issue Aug , Pages 5-16

Journal Article
Risk management: one institution's experience

This paper was presented at the conference "Financial services at the crossroads: capital regulation in the twenty-first century" as part of session 7, "The future of capital regulation." The conference, held at the Federal Reserve Bank of New York on February 26-27, 1998, was designed to encourage a consensus between the public and private sectors on an agenda for capital regulation in the new century.
Economic Policy Review , Volume 4 , Issue Oct , Pages 237-240

Journal Article
Understanding risk management in emerging retail payments

New technologies used in payment methods can reduce risk, but they can also lead to new risks. Emerging retail payments are prone to operational and fraud risks, especially security breaches and potential use in illicit transactions. This article describes an economic framework for understanding risk control in retail payments. Risk control is a special type of good because it can protect one payment participant without diminishing the protection of other participants. As a result, the authors' economic framework emphasizes risk containment, primarily through the establishment and enforcement ...
Economic Policy Review , Volume 14 , Issue Sep , Pages 137-159

Journal Article
The challenges of risk management in diversified financial companies

In recent years, financial institutions and their supervisors have placed increased emphasis on the importance of measuring and managing risk on a firmwide basis?a coordinated process referred to as consolidated risk management. Although the benefits of this type of risk management are widely acknowledged, few if any financial firms have fully developed systems in place today, suggesting that significant obstacles have led them to manage risk in a more segmented fashion. In this article, the authors examine the economic rationale behind consolidated risk management. Their goal is to detail ...
Economic Policy Review , Issue Mar , Pages 1-17

Journal Article
Cash holdings and bank compensation

The experience of the 2007-09 financial crisis has prompted much consideration of the link between the structure of compensation in financial firms and excessive risk taking by their employees. A key concern has been that compensation design rewards managers for pursuing risky strategies but fails to exact penalties for decision making that leads to bank failures, financial system disruption, government bailouts, and taxpayer losses. As a way to better align management's interests with those of other stakeholders such as creditors and taxpayers, the authors propose a cash holding requirement ...
Economic Policy Review , Issue Aug , Pages 77-83

Journal Article
Bank corporate governance: a proposal for the post-crisis world

The corporate governance problems of banks are qualitatively and quantitatively different from those of other firms. The authors argue that a key factor contributing to this difference is the growing opacity and complexity of bank activities, a trend that has increased the difficulty of managing risk in financial firms. They also cite the governance challenges posed by the holding company organization of banks, in which two boards of directors?the bank?s own board and the board of the holding company that owns the bank?monitor the bank. This paradigm results in significant confusion about the ...
Economic Policy Review , Issue Aug , Pages 85-105

Journal Article
Risk management, governance, culture, and risk taking in banks

This article examines how governance, culture, and risk management affect risk taking in banks. It distinguishes between good risks, which are risks that have an ex ante private reward for the bank on a standalone basis, and bad risks, which do not have such a reward. A well-governed bank takes the amount of risk that maximizes shareholder wealth, subject to constraints imposed by laws and regulators. In general, this involves eliminating or mitigating all bad risks to the extent that it is cost effective to do so. The role of risk management in such a bank is not to reduce the bank?s total ...
Economic Policy Review , Issue Aug , Pages 43-60

Journal Article
An economic perspective on the enforcement of credit arrangements: the case of daylight overdrafts in Fedwire

A fundamental concern for any lender is credit risk - the risk that a borrower will fail to fully repay a loan as expected. Thus, lenders want credit arrangements that are designed to compensate them for - and help them effectively manage - this type of risk. In certain situations, central banks engage in credit arrangements as lenders to banks, so they must manage their exposure to credit risk. This article discusses how the Federal Reserve manages its credit risk exposure associated with daylight overdrafts. The authors first present a simple economic framework for thinking about the causes ...
Economic Policy Review , Volume 14 , Issue Sep , Pages 161-168

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