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EFFICACY OF RISK MANAGEMENT IN CURRENT GLOBAL CRISIS

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CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND OF THE STUDY The turmoil of the economic crisis at the international level is characterized with the dislocations of financial market and liquidity. Most of the countries and financial markets seem to be strengthening, but most severe issues remain. Though, the sector related to financial services are getting better, institutions and organisations are not coming back towards the improved situations; in its place, they are performing businesses in a transformed environment marked by fundamental changes. The assumptions and methods of risk management, over the past few years, have been challenged as never before. Several institutions, therefore, are re-evaluating their governance models of risk management. These models comprise a more dynamic role for their boards in monitoring risk management. Some methodologies of risk management may need to be revaluated and corroborated to measure whether they effectively assess the tail risk from rare, but potentially terrible, occasions. The business models have been revising by several institutions due to the financial and economic crisis at the global level and the regulatory amendments that have resulted, and so the programs related to risk management may need to adjust. A number of regulatory amendments will probably imply greater oversight, chiefly for institutions that are considered to be systemically imperative. More than 80% of institutions had a specified risk governance model and approach, and roughly 75% showed that their board of directors had endorsed the policy of risk management or enterprise risk management (ERM) framework. It is a fact that the designation of CRO (chief risk officer) continued to become more and more prevalent. About 85% of institutions had a CRO, up from 74% in 2008 and 65% in 2002. The CRO has been given a high profile, reporting to the board level or to the CEO, or both, at 85% of institutions, according to 52% of institutions, the executive sessions are conducted by board of directors with the CRO, compared to 38% in 2008. Following the global financial crisis, the significance of integrating risk management deliberations into performance assessments and compensation decisions has been extensively discussed; 38% of institutions showed that they had entirely or considerably done so for business unit personnel. ERM programs have been adopted by most of the institutions. About 79% of institutions reported that they have an ERM program in their workplaces, a rise from 59% in 2008. The most challenging issues in enforcing a successful ERM program, referred by about 25% of institutions as tremendously challenging, were incorporating data all over the organisation and cultural concerns. Institutions were well ahead in Basel II enforcement, with 70% having entirely or mostly completed enforcement in the domains of external agency ratings (for the standardized

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approach), calculation and reporting, internal audit review, and governance and controls. About 30% of executives anticipated that the Basel II rule revisions announced in the mid 2009 would have major level of impacts on their strategy in these domains as inflowing in new geographical markets, transforming their business framework, or carrying out mergers and acquisitions? Institutions, as instance, subject to Solvency II, more than 70% reported they makes planning to concentrate on the future program initiation, analysis of gap, and planning; risk governance; and Own Risk and Solvency Assessment (ORSA). Though, the ratio of institutions that measure economic capital enhanced since 2008. The practice was a long way from universal. About, 65% of institutions measured economic capital for risks related to credit, market and operation; 29% on the other hand did so for liquidity risk and about 17% for strategic risk. The utilisation of stress testing is progressively more common throughout the industry supplementing the exploitation of Value at Risk (VaR) and different risk analytics. The stress testing was used by about 88% of institutions for risk factors distressing their credit portfolio, a rise 79% in 2008, whereas 75% carries out stress testing for market risk. Moreover, over 80% of institutions saw major impacts from regulatory transforms in the economies where they perform business; at 40% of responding institutions, these impacts integrated the need to preserve higher capital levels and the need to sustain higher liquidity proportions. Development and advancement has been made by most of the institutions in enforcing methodologies of operational risk management. About 60% of executives perceived their operational risk evaluations and internal loss event data to be tremendously or very well developed, a rise from about 40% in 2008. According to the reports of many institutions, they have extra work to do in ameliorating their risk technology mechanisms. About 75% of executives viewed their institutions to be tremendously or very successful in handling risks related to credit, market, and liquidity, a lesser 60% viewed that their technology systems to be so efficient in assisting the management of risks of credit and market, and 46% reported the same issue regarding the management of liquidity risk. With the perspective of potential risk management technology ameliorations in the future, the two main domains, including data quality and management and enhanced risk reporting, were given the greatest level of preference by respondents of the survey, at about 48% and 44% respectively. Several challenging issues have emerged by the current economic and regulatory environment for financial institutions and therefore for risk management. In fact, supple programs of risk management may assist financial services to be successful in meeting to new business models and changing regulatory prerequisites. Big, systemically imperative financial institutions may

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also have further initiatives to meet with increased capital, liquidity reporting, recovery resolution, and other necessities. It is a considerable fact that potent risk governance models persists to increase in worth and value, and boards of directors will probable need to persist to be energetically engaged in giving input into, challenging issue, and approving the model of risk management and monitoring the program. The increasing dominance and popularity of a CRO position as a team member of the senior management is an optimistic inclination: The CRO can assist make clear accountability for the risk management program and can help the board by facilitating a viewpoint, independent of management of key risk management concerns and the risk profile of institution. Risk management programs, at most of the institutions, are probable to comprise a growing range of risk types, including model risk, and to use more advanced techniques, such as stress tests. Information systems and risk technology may need to be advanced to easily incorporate risk data consistently across different products, geographies, and counterparties. The risk profile of an institution, in the last analysis, can be specified by all the business decisions taken on the daily basis by employees across the organisation. The connections between business operations and effective risk management should continue to be evaluated and fostered. Besides a concentration on risk management methodologies and reporting, higher level of management may need to more develop an environment of risk-awareness across the organisation. A vital deliberation in this endeavour is the closer coalition of performance management and incentive compensation with risk deliberations and accountability. Starting with potent governance by the board and higher management, and persisting with a strong concentration on risk management by all the employees, institutions may be well positioned to lead successfully the challenging issues of a changed environment for risk management.

1.2 THE ROLE OF RISK MANAGEMENT The role of risk management, in a typical firm, is to address and assess the risk factors confronted by the organisation, to convey these factors of risk to higher level of managers (and probably the board of the firm), and to supervise and deal with those risk factors in a manner that makes sure the organisation bears merely the risks to which its board of directors and the management want disclose. To direct them in overseeing and dealing with risk factors, many of the firms define one or more measures of risk in general. The ultimate decision to take identified risks rests not with the risk manager, but with the higher level of management. However, this decision relies on the risk appetite or forbearance of a firm, and specifying that appetite is the managements and boards primary responsibility. Effective and successful risk management does not five a guarantee about any type of failure, even in the firms with the effective and expert risk management personnel and mechanisms, big losses can and will happen on condition that taking the risk of big losses enhances anticipated

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profit levels adequately for senior managers to be eager to take that risk. Such type of losses, with an effective risk management system, will be attributable to an unlucky draw, to (as instance) a one-in-a-hundred event. In the end, the possibility of these types of big losses will rely on options made by those entrusted with ascertaining the risk appetite of organisation. The basic task of risk management is to make sure that the higher management realises the likelihoods linked with potential results of the companys strategy prior to it takes any decision to commit the capital of company. While realising and knowing the primary role of risk management is precious, it is also vital to comprehend the several approaches wherein the failures of a risk management system may arise. The initial measure in risk management system is to address and evaluate the risks. Risks are evaluated with metrics that amassed the different sorts of risks to aid higher management comprehend the overall position of risk in the company. The selection of risk metrics is considered as the foundation of risk management system. A situation in which a risk managers measures risk using measures that are insufficient to the strategy of a company, risk management system can fail prior to the computer systems are ever turned on. After the selection of a risk measure, two fundamental kinds of mistakes are there that can be made in evaluating risk. These are known or identified risks that can be mis-measured and the other one is important risks that can be neglected, either for the reason that they are hidden or incorrectly viewed as immaterial. After the identification and evaluation of risks, they must then be conveyed to the employers of the company.

1.3 PROBLEM STATEMENT Ameliorating the tools and practices of risk management are among the top priorities for investors after the recent financial crisis throughout the world. The current employs the challenging issues created by the global crisis to underline the strengths and weaknesses of common tools related to risk management. The study also defines main principles of risk management, presenting a holistic approach to demonstrate how management might best structure their risk management endeavours. Taking of risk is at the core of active asset management. It is what allows active managers to follow standard level of performance, as mentioned above, and is the flip side of opportunity and incentive. Active managers within the management with long-standing, thriving histories are also frequently successful risk managers. Managers, on the failure of the risk management process, may experience it difficult to fulfil their performance targets over the course of a complete market cycle. Broadly, risk management is described as the measure of the uncertainty level regarding an actions outcome. Different sorts of risks are there and they change regularly. It is our responsibility as investors to take complete charge of measuring, overseeing, and handling risk. These specific tasks cannot simply be outsourced to a quantitative model devoid of realising the overall environmental situation. Thoughtful analysis by portfolio managers is basic need of them in conjunction with

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professionals and experts of risk management aware of the strengths and weaknesses of risk models. Risk taking is at the core of active asset management. It is what enables active managers to pursue above-benchmark performance and is the flip side of opportunity and reward.

1.4 RESEARCH QUESTION The methods and techniques of traditional risk management are entrenched in history, and the historical record does not constantly replicate itself precisely. The focus of effective investment risk management is on what could probably happen, despite of what has previously occurred. However, the following questions are the main focus of current study: 1. What are the effects of segregating the function of risk management from the investment process? 2. What are the motivating forces of incorporated risk management program? 3. What is the contributing part of structured finance, risk management in recent global financial crisis? 4. How organisations, in financial crisis, can deal with funding and liquidity risk management? 5. How changes in risk management are largely applicable to general organisation and market stresses? 6. What are the lessons about credit crisis for modellers? 7. What are the main factors of success for enforcement of risk management benchmarks in firms?

1.5 RESEARCH OBJECTIVES The current study is designed to evaluate the overall effectiveness and success of risk management in financial crisis. Following are the key objectives of the research study: To determine and assess the effects of segregating of risk management function from the process of investment; To expose the motivating forces of incorporated risk management program To assess the contributing part of structured finance, risk management in recent financial crisis To investigate the approaches organisations can deal with funding and liquidity risk management in financial crisis

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To locate the basic causes risk management changes are largely relevant to general organisations and market stresses To evaluate the lessons of credit crisis for modellers To determine the main factors of success for enforcement of risk management benchmarks

1.6 PLAN OF STUDY (discuss each chapter in brief)

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CHAPTER TWO: RESEARCH METHODOLOGY

2.1 RESEARCH METHOD The research refers to the construction of a scientific object. Research permits the author to conduct an investigation about a phenomenon, address and solve a problematic issue, question or disprove the results of the study, experience a new process, a new solution, a new theoretical approach and elucidate a phenomenon, according to Patton (2005). The research in fact is a key to open the doors of change, forethought and the innovation. It also assists to optimise the tools and technology. As far as scientific research is concerned, it is a dynamic process and a logical approach that permits analysis of the phenomena, problems to solve, and precise answers from investigations and explorations. This overall process is characterised by the truth that it is wellorganised and systematic and expand our knowledge base (Creswell, 2007). This chapter is research methodology that defines the main issue, develops hypotheses and makes recommendations for collecting and evaluating the financial data. After that, this section will make conclusions and further research in this particular venue. They assist in the development of the hypotheses related to risk management. A mixed research method will be followed in this research study. Based on six research objectives, it seems appropriate to use a mixed methodology of research, where the researcher collects both qualitative and quantitative data. It is the natural consequence and especially pragmatic methodologies traditional quantitative or qualitative in nature. The mixed research methodology allows the strategic marriage of qualitative and quantitative data in a consistent and harmonious to enrich the search results. This hybrid approach makes it possible to borrow from various methodologies, qualitative or quantitative, depending on our goals research. With mixed approaches, there is a kind of pluralism methodological. In addition, the mixed research methodology facilitates triangulation search results. Kothari (2004) noted that mixed methods often generate search best results. However, the researchs author is completely aware of the content analysis as research method. This research method is more important as well as relevant to this study. Content analysis refers to the qualitative methodologies employed in the social sciences and humanities. However, to gain the precise results from this study designing the system of concepts and plans is necessary (Berg, 2004).

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RESEARCH OBJECTIVE The key research objectives are: To find out the impacts of separating and isolating risk management function from the investment process To find out the driving forces of integrated risk management To find out the role of structured finance, risk management in recent financial crisis To find out the ways firms can manage funding and liquidity risk management in financial crisis To find out the reasons risk management changes are broadly applicable to general firm and market stresses To find out the driving forces of integrated risk management To find out the credit crisis lessons for modellers To find out the key success factors for implementation of risk management standards in organization

RESEARCH DESIGN Researchers from all fields may be required to develop a research design to conduct a research. A research design comprises the method used for performing scientific research. The study design identifies the type of study (such as meta-analytic, descriptive, experimental and semiexperimental, correlational, review) and sub-type (including descriptive-longitudinal case study), research question, independent and dependent variables, hypotheses, experimental design, and, if pertinent, methods of data collection and a statistical analysis plan. (Creswell, 2009) The researcher will use the descriptive research in this study. For this, historical research design method will be employed. The historical method includes the methods and guidelines by which historians employ primary sources and other evidence, like secondary and tertiary sources, to conduct a research and then to write history. The question of the nature and in fact the likelihood, of effective historical method is raised in the philosophy of history, as a question of epistemology. However, descriptive research method assists researchers plan and perform descriptive studies, intended to provide vast descriptive details regarding people, places and other phenomena. Descriptive research is frequently related with psychology, sociology and anthropology. Moreover, researchers also use it in education. Often, the descriptive research method comprises wide observation and note-taking, and also comprehensive account. In a nutshell, this research design can help identify vital aspects, developing a base for more-accurate research.

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RESEARCH APPROACH In research, researchers frequently refer to the two broad reasoning methods, including the deductive approach and the inductive approach. Inductive reasoning is generally linked with the interpretivism philosophy. This approach permits the researchers to give more subjective reasoning through the different examples from real life (Winch, 2009). Eve argument is based on experience or observation and uttered inductively in this approach. In brief, Inductive research approach works from the more specific observations and examinations to broader generalisations and theories. Sometimes, this approach is called the bottom up approach (Kumar, 2005). Deductive approach, on the other hand, is associated with the positivism philosophy. Positivism philosophy integrates hypothesis to attest assumptions and hypotheses. In deductive research approach, researchers should analyse in a general way, but this research issue is specific and linked to the development of human resources in the organization. Briefly, deductive approach works from the more general to the more specific and on certain occasions, this is informally called a top-down approach (Winch, 2009). In the current research study, the author will use the deductive research methodology. The reason behind is that the deductive reasoning permits the researcher to establish a hypothesis with the help of theory. A wide range of data is collected by the researcher in order to validate or invalidate the hypothesis to determine and sole the research problem. This approach of reasoning is firmly based on moving from the more general concept to the more particular state and it has also a correlation with the positivism philosophy, as mentioned above, which consist of hypothesis to validate assumptions. An important thing for the researcher is that in this type of reasoning approach they should be more general and moved through a more specific situation (Winch, 2009).

SAMPLING FRAME For researchers, it is necessary to discuss sampling frame in the study because that is what makes sure that systematic slip or partiality, has not emerged into study. For this study, sampling frame consists of the past researches and studies related to financial crisis. The author red and examined the research studies ranging from the years 2005 to 2011.

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DATA COLLECTION TECHNIQUES There are two techniques to collect reliable data, including primary data collection technique and secondary data collection technique. Primary data are collected by researcher for the first time and therefore are in crude form. However, secondary data have previously been collected in the past studies. Primary data are always gathered from the source. Either investigator or his agents collect primary data. Primary data are always given in the first element of the original receipt and the nature of the material. These types of data require the use of statistical methods to assess and illustrate the objectives. Put differently, primary research refers to the data which is acquired directly through face-to-face interviews and observations and questionnaire (Creswell, 2007). Secondary research, on the other hand, is the collection of existing research and literature which has already been performed on the research area at hand (Creswell, 2007). For obtaining secondary research, different sources are there which include books, articles, journals, and magazines. Most of the articles were searched from Internet or this research. All the links and references for those will be provided throughout the research (Kumar, 2005). In brief, secondary data are those which have been gathered already and evaluated through statistical machine (Kothari, 2004). However, the author of this study will use the secondary research and collect and assess the primary data of 2005-2001 studies in order to gain results. The secondary data will be gathered and assessed from secondary research approach, including books, articles, journals, database libraries, Internet source, etc.

LIMITATIONS OF THE RESEARCH The limitations of the research refer to the characteristics of the research methodology that have impacts on the results application or interpretation of the research. Limitations are actually the restraints on generalisability and value of findings that are the result of the manners wherein a researcher select to design or plan the study and the research method employed to develop validity, both internal and external. Remember that acceptance of limitations in the study is an opportunity to make recommendations to conduct more research in the future. If a researcher does connect limitations of his study to recommendations for future research, be confident to elucidate the approaches wherein these unanswered questions may become more purposeful due to the study. It is important for researchers to develop knowledge about limitations in the research. Knowing about limitations of the research may promote critical thinking skill of the researcher. In fact

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every study, despite how well it is carried out, faces some limitations. Therefore, it does not appear rational to employ the words prove and disprove regarding the findings of the research. It is always feasible that future research may cast uncertainty on the strength and legitimacy of any hypothesis or the conclusions developed from a research study. The existence of such a measure could be unreliable. High quality materials are likely to be misunderstood by the methods of measurement. It can miss a lot of interaction. In this study, there is usually a minimal time and space in which data are collected. The research would be having the following limitations. This research does not contribute to the generation of new ideas in other financial fields, because this study only focuses on risk management. There has been an effort to decrease the impact through the sampling technique (Creswell, 2007). The research would be carried out in specific field that is efficacy of risk management in current global crisis. The results of this study cannot be employed for other industries or other environmental condition as well. The last limitation is that the collection of secondary data is really a time consuming task.

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KEY OBSERVATIONS AND FINDINGS

Most of the weaknesses and limitations highlighted in the initial report continued to play a role to financial strains. Regardless of the statement of several months as we presented our first report of in March 2008, it determined that a majority of companies had not completely identified the core problems raised at that moment. The reality that these firms had not done so is due partly to the substantial investment and know-how required to effect crucial changes throughout the dynamic, complex global financial institutions, and partially to the increased challenging issues of funding and liquidity risk management that increased over 2008 and into 2009. The four risk management practices across the organisation that the study had addressed in the first report as characterising better performance from poorer were: effective risk identification and analysis across the organisation, steady and frequent application of independent and accurate assessment practices throughout the organisation, effective management of funding liquidity, balance sheet, and capital, and Informative and responsive risk measurement and management reporting.

Introducing the above mentioned risk management practices systematically and entirely throughout the large, complex firms requires substantial resources, knowledge and experience. Moreover, happenings after the publication of report disclosed more limitations and weaknesses within the biggest financial institutions in the domains of corporate governance and control procedures, and also in the processes related to capital management and liquidity. The failure of liquidity risk management practices, in particular, has been at the core of the emerging financial calamity in this era. Moreover, practices related to funding and liquidity risk management may be more complex to change under pressure, since they are frequently closely connected to central strategies of ach organisation.

Issues of Funding and Market Liquidity The events of 2007-09 showed the large level of vulnerabilities of companies whose business models heavily relied on uninterrupted approach to protected financing markets. Most of the companies depended on undue temporary wholesale financing of long-standing illiquid assets, in most of the situations, a practice in all the economies that made it so hard to survive with market stresses without deposits and self-governing and the support of central bank. The advantage of the opportunity had been taken by the borrowers the market bear to get temporary (immediately) funding for assets that should more properly have been financed with long-standing, stable funding. Du to facing the uncertainty and insecurity in the value of particular instruments and

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attentive of the elevated instability of assets more commonly, lenders insisted considerable cushions, or haircuts. Organisations that were less affected by developments of market had a priori discipline to oppose extreme short-term funding. Some of the larger-scale and more diverse financial service institutions were competent to weather occasions firstly by drawing on other funding sources, including deposits, liquidity pools as sovereign bonds and, when accessible, lending facilities from central bank. Some of the business models in companies also depend on excessive leverage, which, combined with uncertainties regarding the understandable assets value of the organisation, increased solvency and business-model issues among the counterparties and creditors of the organisations. Originations allowed excessive leverage and dependence on short-range financing to develop with the passage of time due to the amalgamation of risk governance limitations and misaligned benefits, imperfect confine of risk in reports of management, limitations of regulatory needs, and unsuccessful market regulation. A large spectrum of financial institutions was affected by these structural issues. These issues include the different investment banks of U.S., certain mortgage banks of the UK and U.S., some Landesbanks of Germany, and some banks that had newly done their mergers that strained their capital base. The market stresses, however, have affected almost every financial institution through the world economies, with majority requiring some type of help. In this situation, the support of exceptional official sector was essential to preserve the financial systems feasibility. The disturbance of the secured financing sector emphasised on different problems regarding the U.S. triparty market for repurchase contracts (repos). Often the securities dealers relied on the triparty repo market to support financially specific securities, progressively more over the time. Lenders supported financially by triparty major volumes of illiquid securities that they would be forbidden from keeping should a borrower fail. Clearing agent banks undertook major credit risk by expanding intraday credit devoid of completely deliberating whether they would be capable to liquidate security should the need crop up. Borrowers failed to expect the collateral money that their clearing agents would need when confronted with facilitating intraday funding for a fragile borrower with a weakening collateral pool. Likewise, the insolvency of Lehman Brothers International (Europe)LBIEshowed the risks of depending on the rehypothecation of customers securities as a funding source. A number of counterparties of LBIE nominated to have accounts that permitted them to rehypothecate securities positions to get fund. Following the declaration of bankruptcy by the LBIE, main brokerage customers wanted to take out from these arrangements. These customers, however, were perceived the estates unsecured creditors and found themselves devoid of approach to their positions. The LBIEs failure emerged issues among hedge fund clients regarding the truth that their main brokerage free credit balances and other assets in the UK, in

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some cases, were not subject to isolation; while in most of situations clients decided to take out from these arrangements. Organisations failed to understand that two vital funding sources, securities lending and money market funds, could inflict more demands on firm liquidity at the stress period. Traditional funding sources, mainly for European-based banks, like securities lending reinvestment pools and money market mutual funds, confronted with major stresses to minimise their investment positions. These stresses became noticeable after the proclamation of losses in the Primary Fund series of the Reserve Fund in U.S.

Organisations Re-assessment of Existing Practices The financial service institutions and firms, across the world, partaking in the liquidity and selfevaluation practices have commenced re-assessing of existing exercises at the level of corporate and business line. It is acknowledged by many organisations that if practices of robust funds transfer pricing had been implemented earlier, they would not have carried on their trading books the considerable levels of illiquid assets that eventually led to heavy losses and would not have developed considerable contingency liquidity risks related with off-balance-sheet exposures. According to organisations, considerable endeavours are in progress to enforce or increase the practices of funds transfer pricing, comprising lengthening the range of business activities expose to transfer pricing and incorporating transfer pricing more intensely with strong processes. Moreover, most of the organisations are re-assessing how they evaluate their needs in the future for funding. Prior to the financial crisis, many companies heavily depend on a months of [contractual] coverage metric that did not properly show the contractual and behavioural demands activated in a demanding environment of market. The coverage metric, as instance, did not catch most of the stresses that emerged throughout the financial crisis. Realising the weakness and limitation of their existing initiatives of funding requirements, organisations are currently increasing their calculations about the needs of stress. Received by organisations as well as supervisors, a key lesson of the crisis was that complex corporate structures deterred effective contingency funding. Organisations determined that complex corporate frameworks, frequently developed to arbitrage tax and regulatory capital structures, also inflicted major level of restraints on the wave of funds throughout the company between legal bodies. Organisations, therefore, are admitting the worth and importance of a bottom-up approach to contingency planning.

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Supervisory Assessment of Firm Self-Evaluations and the Identification of Vital Domains for Continued Amelioration The studies, in the midst of growing losses in 2008, was published by several public and private sector groups following the first SSG report that expressed principles or practices considered to be crucial to the resilience of globally active financial service institutions. Encouraged by general contract on the advantages of most of these principle and practices, twenty companies were invited by the associates of SSG in order to assess their overall practices against the results of these studies. Many participating organisations offered favourable self-evaluations, although to altering degrees across the set of suggestions. Whereas the SSG usually concurs with the comparative ranking of obedience with particular suggestions, it is our belief that absolute rankings were too constructive and that considerable work is still required to accomplish complete alignment with the existing suggestions and examinations. In particular, there are two main aspects that drive the gaps between present practices and those supported by industry groups and supervisors. The first one is that the information technology (IT) infrastructure in most of the companies is insufficient to effectively examine risk exposures, a problematic issue long in the making that will consume time to therapy. The second is that the companies need to re-assess the preference they have conventionally given to those businesses that generate revenue over the functions of reporting and control. Section IV below comprehensive details ten crucial domains for amelioration that appeared from the self-evaluation results and interviews and that are generally pertinent throughout the companies. Most of the supervisors accept as true that substantial work remains in the domains, including governance, infrastructure, incentives and internal level of management, controls, and overall infrastructure. The lack of proper action in some crucial avenues, like the proper placement of incentives and ameliorations to the IT infrastructure of companies, should ask questions from boards of directors and higher management regarding the sustainability and efficacy of current changes. Constantly supervision on the supervisors part and continued obedience and dedication on the companies part will be necessary if the required investments and amendments to practice are to be effectively made. An overarching examination regarding domains indicated for amelioration is that weaknesses and limitations in governance, infrastructure and incentives diluted the efficacy of risk controls and contributed to the systemic vulnerability of last year. We found in the interviews, performing for this report, that most of the organisations, irrespective of whether they needed support of government, and their supervisors had measured that the controls and benefits in the form of incentives enforced across the industry had failed. Four challenging issues in governance were showed by these failures:

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the boards and senior managers reluctance or inability to express, measure, and adhere to a risk level tolerable to the organisation, arrangements that supported risk takers at the cost of independent risk managers and control staff, plans of compensation and incentives that contradicted with the organisations control objectives, and an insufficient and frequently fragmented infrastructure that deterred successful risk identification and measurement.

In governance, a main weakness stemmed from what most of the senior managers acknowledged was an inequality between the risks that their companies took and those that their boards considered the companies to be facing. Additionally, supervisors observed inadequate evidence of active board participation in establishing the risk appetite for companies in a manner that realises the complications of taking that risk. Particularly, only seldom did supervisors observe companies share with their higher managers and boards: a) strong initiatives of risk exposures (and associated restrictions), b) the capital level that the company would need to preserve following sustaining a loss of the risk measure magnitude, and c) the managements actions to re-establish capital following sustaining a loss. Many supervisors accept as true that active participation of the board in ascertaining the risk acceptance of the company is significant to making sure that obedience is sustained facing pressures and stresses of the future market for too much risk taking. The level and influence of revenue, within companies, generates obviously exceeded those of functions related to risk management and control. Belatedly answering to this inequity, almost all the companies have reinforced the power of the risk management function and augmented the resources dedicated to it. Organisations, however, confront with substantial challenging issues in establishing the required infrastructure and management information systems (MIS). We observed some of the inequity between risk and rewards can be noted in the approaches to compensation. An extensive level of recognition is there that practices related to compensation were forced by the need to appeal and keep talent and were frequently not incorporated with the control environments of the organisations. In general, the crisis demonstrated the meagreness of several companies IT infrastructures in assisting the broad management of financial risks. In different situations, the barrier to ameliorating the systems of risk management has been the inadequate incorporation of data that has produced from multiple and frequent mergers and acquisitions of the companies. This particular issue can distress the capability of companies to enforce successful transfer pricing, constantly value complex products across a company, measure the levels of CCR (counterparty credit risk), and carry out forward-thinking stress tests. Developing more strong and viable infrastructure systems needs a strong commitment and dedication; however, is considered as significant to the lasting sustainability of ameliorations in risk management.

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While organisations reported improvements to, and highly use of, stress testing to communicate risk to the board and higher level of managers, it is noted by supervisors that major gaps remained in the companies capability to carry out tests throughout the company. Organisations cited considerable support by the management for improvements to practices of stress-testing, opposite of previous experiences. However, it is also a fact that many organisations still do not have the full capability to carry out often and strong stress tests throughout the company, though considerable endeavours are in progress to identify this problem.

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FUNDING AND LIQUIDITY RISK MANAGEMENT

Funding and liquidity problems were central to the financial crisis in the fall of 2008. In this section, we first provide background on the funding challenges experienced by many financial firms during the crisis, and then discuss observed and planned changes in funding and liquidity risk management practices.

BACKGROUND ON MAJOR FUNDING STRESSES This rare, in some cases, part of the capital of the unprecedented market pressure in March 2008 defined functions since the beginning of the crisis, the main objective of this report. SSG member institutions and companies involved in the exercise of the fundamental nature of the agreement, funding pressures, despite their different perspectives, different points of view in this section, for the correlation of business each province and territory. We do not provide a complete record of all of the companies during this period of financial problems that may be encountered. Instead, we focus on the many companies stand out, the most important member institutions SSG during the crisis, in our monitoring capabilities of the key issues and events features.

General Firm and Market Stresses The 2007-09 events highlighted the vulnerability of society. Its business model is dependent on continued access to mortgage financing market. From 2007 to the summer of 2009, the finance lender less traditional, more difficult to bring down prices. In addition, counterparties and creditors seek to reduce as "low" in the amount of credit granted by the company to reduce exposure and increase hair funded positions periods shortened to extend credit. In addition, mortgage lenders tighten their definition of acceptable collateral. These trends are of particular difficulties, the company does not have sufficient cash reserves or other sources of funds, heavily dependent on financing illiquid assets to short-term pensions. March 2008 near collapse of Bear Stearns liquidity crisis highlighted several important aspects: Liquidity depends drainage business created short-term funding security market to finance illiquid long-term assets ; Enterprise Vulnerability, loss of insurance funds, when they have access to liquidity from the central bank ; Tripartite repo delete a key role ;

Ways to make their expression, rather than customers and investors worried about the prospects of the company through stock price declines, and expanding the number of credit default swaps,

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but also by the withdrawal of balances free credit in cousins brokerage and creative industries increased from business. Bear Stearns major concerns of brokerage customers, triggering rumours about the viability of the company, resulting in a short time to exit the free credit balances. Even more critical is that mortgage financing Bear Stearns rely largely on disappeared repo counterparty confidence to cope with sudden and huge losses. While the pension funding was easy to roll over risk, over-reliance on daily basis repo Bear Stearns illiquid funds proved particularly problematic. Ultimately driven by the stock price of the company and the expansion of credit, lack of lenders willing to provide funds, Bear Stearns, security and even cause it to be forced to sell. By following the collapse of Lehman Brothers Bear Stearns dynamic just described a similar dynamic. However, with the collapse of Lehman Brothers, in fact, much larger than the company did not have an impact on the financial markets: The assets spread the practice of re-mortgage the main engines, sent to liquidity risk another company. In the UK, there is no liquidity the central bank has provided the main bag, Lehman Brothers International (Europe), and has reached an agreement to transfer the business to a third party buyer clients. Accordingly, LBIE bankruptcy while maintaining significant assets under custody cannot be returned to the customer for a long period and therefore cannot be exchanged or easily covers customers. In addition, LBIE failed hedge funds as the main corridor, and then exposed to a significant risk of driving on your mortgage securities under English law session, the client is always used as a general creditor of such assets in return. Create lost property remortgaged and "freeze" the assets managed in the community alarm coverage and because funds starting from the position in other companies with similar accounts. Some companies liquidity of assets financed exclusive position remortgaged depth financial pressure. Liquidation fragile that investments in money market funds financial institutions. The products are mainly the reserve fund "money off" bankruptcy, because of its holdings of commercial paper Lehman Lehman Brothers. When this event is combined with a growing concern that some mutual funds money market (FMA) can play the role of companies in financial difficulties, institutional investors have started to run, prompting many investments in money market funds money realized redemption requests fulfilled. Securities lending cash reinvestment of funds also reduces the vulnerability of financial institutions to provide funds. As traditional buyers of debt financial institutions, pools reinvestment flows have reduced the demand for these investments, especially when market forces caused by the price / value for this type of debt will be reduced and become illiquid. In addition, the need to reinvest the money pool has increased dramatically, the borrowers debt, the loan value of the shares for cash collateral decreases and retirement community illiquidity and losses. Interbank lending, particularly in Europe, has become extremely concerned about the collapse of institutional investors after the collapse of Lehman Brothers (Lehman

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Brothers) and losses Washington Mutual banking company debt and the solvency of the bank. Dynamic observation supports many cases, Lehman Brothers and Bear Stearns mortgage market weaknesses in the peak of the crisis are so remarkable.

SECURED FUNDING/TRIPARTY REPO TRANSACTIONS Repurchase agreements tripartite short term increased use of long-term illiquid assets, the bank credit facility intraday risk clearly defined large financial institutions trust the financing of the mortgage market financing is not easy to reduce the quality or JP Morgan Chase has not acquired the assets and liabilities of the holding company, and promised no senior unsecured debt or subordinated bank debt and senior debt holders received obligations of Mutual Bank minimal, if any, recovery of value, while the creditors to reassess the risk of the portfolio of unsecured debt. These results also underscore the attention of investors, the Bank and the risk of holding debt. Price based on short-term instruments has contributed to a false sense of security, comfort and the liquidity position of the company. The tripartite repo market grew to become an important source of funds, other financial institutions and brokers do not enter in stable or low-cost deposits, unsecured credit line pools. The changes in the UK models, BIS (third tripartite repo) as a proxy, and provide daily cancel titles intraday credit and cash. Intraday funding set the day before in tri-party repos with the same values. Every morning, the Bank reserves the right to refuse to provide intraday credit. They cannot be trusted if they have credit problems of a particular borrower, or the ability to liquidate the collateral, not the fluctuations in market conditions, a waste of time. If you choose not to deploy bank clearing transaction, the lender the right to liquidate the collateral, the borrower will not be able to recover its inventory of securities. However, in the European model of tripartite repo, no operation of transaction logs. Instead, the borrower can make substitutions issued a third pool agent guarantees, as they continue to meet margin requirements, restrictions on asset quality, concentration limits, etc. Market in September 2008, the event in October highlighted the reversing mechanism in the United States and the potential difficulties in the UK deal with troubled loan agreement. From the perspective of the borrower, the cancellation of the pension means short term tripartite daily for a given borrower in a few days, often overnight loans lender can withdraw. It should be noted that most mutual funds money market (loans on the market, the majority of people) cannot afford to invest directly in securities guaranteed pensions, so that investors can be necessary as soon as possible in case of default of the counterparty Next to have this security. However, over time by changes in the level of liquidity, a good percentage of funds through tripartite repo securities, in fact, the lack of liquidity. Therefore, these loans may be forced to sell and market losses GeSHI Jia downward pressure.

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Intraday clearing banks provide funds for each morning, a large pool of risk and collateral liquidation costs are high market volatility. Deterioration of the borrower often sold and used in other places greater liquidity guarantees and warranty tripartite repo funding pool is becoming more dangerous and less liquid. In addition, a major bank failure may cause the value of securities held as collateral rapid decline. Although the BIS are entitled to their own funding generally cut NA intraday liquidity premium. Thus, the BIS also have first arrived incentives, or inform borrowers who cannot rely on intraday credit or stay locked in tripartite repo if lenders retention value (settlement risk). In practice, face the risk of borrowers low illiquid assets and a large swimming pool, the bank is often the first attempt to obtain additional cash collateral to reduce its credit risk. This is a significant borrower liquidity increased demand for resources. Tripartite purchase includes three very different types of players with different skills to cope with the risks associated with these operations. In addition, the disorderly liquidation of a large number of guarantees, to coincide with a big borrower fails to pose a systemic risk in financial markets. For these reasons, a concerted effort to deal with the risks and related security permission can be lessons learned are the best way. Repurchase agreements and tripartite incentives surrounding the subject is complex, the company has identified a few places, lenders, borrowers and the clearing bank can change their approach: Financing lender much more than the price guarantee, many of whom have extensive tenor, they will not be able or willing to direct investment. Whether the lender will require companies to establish a suitable investment parameter, such as profits, concentration limits, lack of liquidity guarantees and collateral constraints limit the total size, in order to avoid borrower default guarantees liquidation fire sale to support loans have caused material injury. Companies also want to know if some lenders the ability to liquidate the company. Several companies have pointed out that many borrowers are too dependent on short-term tri- party repo, especially fund illiquid long-term assets are not sources of liquidity, and it is very unwise. Many non- borrowers effective circulation of securities, you can limit the amount of tri -party repo financing, and cannot limit its totally dependent on this market. A company provides a framework to identify other sources of funding to enable the operations of the company, if the transaction is not renewed contracts with investors at maturity implemented. Tripartite repo clearing banks in the UK market to improve risk control to avoid unnecessary risks on behalf of pension companies and financial markets. Although it is not the original director of the operation, settlement banks shall ensure that a management framework to ensure appropriate risk intraday liquidity guarantees the value of tripartite resale run. The company said the value of the concentration of the framework must take into account the potential risks of securities, lower quality, or lack of policies and hairstyle credit liquidity. In addition, the company said that the manager of the independent credit risk of the company must monitor the creditworthiness of the

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borrower and behavioural trends, transactions and guarantees, as well as the liquidation of the capital of the bank under the credit risk. Finally, the company reviews its risk management reports, policy upgrade, procedures and processes of liquidation of collateral.

RISK MANAGEMENT CHANGES BROADLY APPLICABLE TO GENERAL FIRM AND MARKET STRESSES The company is working to ensure that they have control of global liquidity, strengthening the role of corporate funds to improve the infrastructure to support the financing related to GIS and stress tests, and try to push the boundaries to build strong cash reserves. Particular attention is paid to the improvement of the process of transfer pricing of funds. Complex corporate structure plan complex emergency funding. Almost all respondents have sought to strengthen the structures and processes in order to improve liquidity management. Company is taking steps to improve its cash flow, management of liquidity risk, and the associated functional structure. In addition, they also tried to improve in these areas and sectors, as well as senior management and the board of mobility between reports and other relevant communications. Also improve the process of transfer pricing, financing and other aspects of emergency plans. Companies and supervisors of an important issue is the extent of these changes, government policies and procedures, and have been proven effective funding and liquidity management, as time passes.

Treasury/Liquidity Risk Management Structure The company said the Treasury organization and interaction in some cases, risk management and business line peak of the crisis in September 2008, liquidity management for the period October, and efficiency is affected. The company said that they had made the change, reflects this knowledge. Some companies - especially those who attribute the risk of risk management, do not belong to a more complete identification of treasury functions, taking into account the liquidity risk of regulatory obligations transferred to the Chief Risk Officer (CRO) or management Place of autonomous liquidity risks in the Treasury unit. The company will be the centralized model of cash to resolve funding and lack of liquidity. Other variations of cash financing guarantee business and cash management business activities of separation and integration online.

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Some companies are trying to improve the state of the treasury unit premium business brokerage desks and secure financing unsecured financing office, coordination between the last two functional areas such as coordination between the particularly important because the risk of loss of funds and guarantee funds should be replaced assets in unsecured financing. Also set up or strengthened risk control channel of communication between functions. Some companies that treasury functions and the solvency ratio is critical for effective risk assessment and monitoring of liquidity status of the counterparty. For example, in one case, margin loans were approved only by the credit department, now approved jointly as credit and financing.

Liquidity Management Information Systems Many companies recognize in their MIS inadequate infrastructure, it is able to produce useful reports, during the financial crisis, understanding, better quality and faster reporting of liquidity during the crisis, liquidity problems and funding of effective management is essential. In this perspective, some companies said they have increased their consumption of infrastructure, improving their data and improve their quality and timeliness of reporting. Report does not adequately reflect the liquidity risk in several key areas, including: Loans and loan guarantees, including the maturity mismatch, liquidity of information; Derivatives business, including collateral outflows due to rating changes and movements in asset prices, Balance sheet vehicles and certain non-contractual obligations, to provide greater transparency about the risks of emergency funds.

During the crisis, more mobility report, companies can better assess the liquidity of the major asset and liability categories, in turn, occur daily, intraday, highlighting the most vulnerable areas to lottery money or withdrawals. Most companies believe that the peak of the crisis, the speed becomes critical business information. The two companies said they had made improvements, management reports and indicators rate liquidity gap and liquidity stress testing standard MIS. At the end of 2008, the liquidity coverage increasingly global in nature, according to respondents. Capture the information contained in these reports discount window rate deposit insurance, cash deposit, newsstand and perspective, excess liquidity and spend money, unsecured financing, debt issuance and balance long-term changes in capital ratios and leverage.

Liquidity Stress Testing

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Market conditions and worsening of the financial situation of the company exposed weaknesses in liquidity crisis simulation methods of the company, especially for mortgages and contingent capital requirements. These conditions deteriorate stressed the need for a more systematic examination of specific events and companies and further afield overlap, such as stress tests and liquidity usual management of the connection between the company. The company hopes to improve the liquidity stress scenarios for the job, especially in the case of overlapping body. Therefore, the company has recognized the need to go beyond the traditional stress test involves a deterioration of credit quality, demotion, and / or programs based on stories and seeking more of a more systematic and sustainable scenes. Some companies have stated their intention of each pressure test and / or the application of various scenarios, including the shortterm and long-term. The company has also focused on improving information on the results of resistance testing and better coordination between sectors. A change of more specific examples are: Some companies have reported a wide range of new scenarios and stress tests, as some types of insurance asset funds, swaps losses, the collapse of corporate crisis, the failure of the counterpart funds to repay the investment and illiquid asset-backed commercial debt notes. Time range of stress tests has changed dramatically. For example, a company has a specific plan and the market situation of the horizon of business two weeks for a period of one month. Another company time span three to six months to a year, which is reflected in the crisis, many companies are experiencing prolonged stress reality. The company mentioned in the review the assumptions underlying the importance of stress testing, tensions on the market during the crisis to some of the actions and events during off balance for more information. For example, the company has revised its assumptions about the availability of long-term financing and / or securitization during the crisis, and the ability to continue to obtain certain types of asset-backed financing, the hairstyle can change measuring different types of guarantees, and the ability to make money from illiquid collateral. However, some companies noted that other assumptions may be too extreme. Mortgage commitments for habitation or substantial use in the illiquidity of the market in the case, for example, exposure to the crisis seems exaggerated. However, the data reflects the survivorship bias that most companies because the company did not abound, behavioural data under severe strain specific company. Reports of the company, the need for further analysis to better understand Deposits are more likely to leave. The further analysis is needed to assess the uninsured organizations national and international front deposit insurance, details of the various vulnerabilities and wealthy clients. Any method of filing an operating company, and noted that the main export restrictions, such as site outages or decrease in cash.

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Most companies believe they are now effectively recognizing legally binding emergencies. After the first great awareness of the problem of ABCP, from August 2007, the company wants a better way to ABCP conduit. Commitments to extend credit, the company have research approaches, but generally not considered during the financial crisis in late 2008, is a major problem. Company does not allocate extraction own expense liquidity problems of the company's corporate bank. Instead, respondents generally believe that more and more companies are driven rotary adverse changes in macroeconomic conditions. More generally, the company plans to make behavioural assumptions overlap contract requirements. For example, companies are reviewing their own assumptions about the renewal of loans; the financial crisis has highlighted the need to take into account the possible impact of the availability of funds report these changes. Many companies have identified the need to identify and prepare non- contingent contract more efficiently. These reputation There are some incidents were not taken seriously, some of the companies in the program planning. These emergencies include support for the investment of funds in the bond market money offers of options, securities market rates, and the need to support an active secondary market, or providing a secondary role as content market. More contingency funding plan does not include this type of all relevant circumstances; the company is still possible to identify the potential contract.

Liquidity Cushions and Limit Structures Respondents generally calculate and maintain measuring financial cushion as months of coverage, which is conceptually similar to the analysis of twelve other rating agencies liquidity. Some institutions need to maintain liquidity to withstand a loss of unsecured funding year. Many institutions have found that this indicator does not take into account the organization faces an important element of pressure, such as the loss of funds and collateral requirements to support the clearing and settlement activities and accepting innovative safeguards to limit risks. Some companies have said they are looking for additional measures time money traditional measures stress coverage. Liquidity crisis, many companies stressed that holds a lot of unencumbered liquid assets, the importance of diversification of sources of funding and maintenance of structural limits and approval requirements for the companies risk appetite and liquidity risk. Most companies said they clench or apply restrictions and approvals related to finance and develop the diversification of funding sources and the importance of maturity greater appreciation. Under normal circumstances, established companies and strict limits on wholesale funding increased funding of such collateral, tenor and address. In some cases, companies significantly reduce restrictions and senior management approves all major financing transactions in the peak of the crisis. Some companies now need new functions cash approval for credit.

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The crisis has highlighted that companies need to strengthen their collateral management and finance and securities practice here for acceptability consideration illiquid types of guarantees can be reduced; conditions hair and others may be crowded at times of tension. Ultimately, Lehman Brothers (Lehman Brothers) bankruptcy, many large facilities must obtain liquidity from the central bank.

RISK MANAGEMENT CHANGES ASSOCIATED WITH PRIME BROKERAGE Internal limits are being established on the use of re-hypothecated client collateral and free credit balances. Firms are strengthening controls over client balance transfers. Dealers and clients are discussing the segregation of initial margins.

Limits on Rehypothecation of Client Securities LBIE experiences of subsequent increase in the contractual documentation and hedge fund clients to renegotiate rights. In particular, limitations are imposed on mortgage again, and agreed to an international agreement on the principal broker, where there is no upper limit. These mortgage restrictions usually set in the margin levels, flow and guarantees cutting and allow operators to friction. There is also a broker push gold to ensure that the expectations of customer service and contractual provisions governing the operation of the alignment of the agreement. Some hedge funds are not willing to send the value exceeds the upper limit of the re- prime mortgage brokerage account and held or three accounts. In response, some companies said they have developed their own remote control or custody of the bankruptcy solutions to meet customer demand for asset protection. In other cases, the company has established an internal limit for its customers after warranty remortgaged.

Enhanced Controls over Requests for Balance Transfers and Financing Commitments In this crisis, followed by the collapse of Lehman Brothers, some business leaders say monitoring and centralized control of the liquidity of the entire company to participate actively in the real-time basis. This becomes especially important for companies after Prime Brokerage business units at local level within the company cash management. As prime brokerage business, balance transfer or instant real time if the effects of friction in the liquidity position of the company often face customer demand customer service sense. In addition to the implementation of new controls on capital outflows, executives accept new business and the financial impact of the imposition of additional restrictions. These restrictions

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limit the financing sales team customer can promise no amount of clear regulatory approval is low or zero.

Reduced Reliance on Free Credit Balances Experience with Bear Stearns, the market exit of the growing awareness of the importance and after the acquisition of Bear Stearns before the credit balance of experience prime broker must take measures to adjust their budgets, particularly emphasized the level of free cash balances, severe market events to make assumptions. In the fall of 2008, the company cannot effectively adapt to these outputs. Back brokerage clients first free credit balances from the top international rider revaluation as a source of funding relatively cheap, its value decreases. The new assessed value is largely controlled by the risk of internal funds transfer and the new agreement to fix prices, to create a society with a central treasury function. Revised price has been reduced from free credit balance reached the level of hedge fund returns. Before the crisis, the company recognizes that free credit balances can quickly extract. However, some companies do not have the scale to prepare and direct the customers investment portfolio and cash balances of Lehman Brothers out of bankruptcy (Lehman Brothers). Therefore, internal reports and transfer pricing should be adjusted to reflect the new profile of liquidity risk. The last change is needed to reduce the use of these relatively unstable spurious sources. Most large brokerage firms are adjusting transfer pricing and management agreements. The adjustment is to ensure strict controls are placed on the side of the brokerage business in the risk for major investment and liquidity risk capital, the risk does not affect the overall risk profile liquidity of the company.

Segregation of Margin Some prime brokerage business customers require an independent quantity (initial margin) according to the International Swaps and Derivatives Association, the Credit Support Annex to be held in separate accounts. Our goal is to reduce the lack of distributors and clients risk. Although we found some requirements, banks generally resist these actions. These include price lock-related involvement of initial margin funds are generally used for liquidity purposes, such as the release of the bank guarantee of payment of compensation margin changing needs. Many investment banks that reduce the number of these requests reduce credit terms. However, with the focus on prime brokerage business results observed in 2008, began prime brokers to hedge funds to provide comprehensive information, providing data management and use of more frequent (sometimes daily) and all assets remortgaged.

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RISK MANAGEMENT CHANGES ASSOCIATED WITH SECURITIES LENDING Beneficiary reinvestment is strict guidelines agent, when in the selection of partners increasingly picky. Companies are tightening controls on mixed accounts also some separate accounts in the mixed migration. The company has responded to the new environment, in September 2008, and 10 months later, the two measures of management and control of risk formal and informal changes. Companies are more focused on increasing insurance and CCR to strengthen liquidity management and reinvestment. In addition, some loans already significant changes in the "intrinsic value" of the beneficiaries, who may have a quantity / value of financial assets, approach.

Higher Standards for Acceptable Collateral Recipients and their agents to set guidelines reinvestment plan of the most conservative lenders. Outside the United States, participants have the right path to the central bank, such as shares and convertible bonds, other asset classes generally considered to maintain a high credit risk and liquidity guarantees. The lack of transparency values , for example, mortgages and private label mortgage-backed securities - the highest since September 2008 is not the ideal form of guarantee between the two. Accompanied by guarantees stricter view - for example, in some cases, CUSIP CUSIP evaluation (although expensive, some people see), and the establishment of a formal review of the guarantee fund, participants credit check.

Higher Liquidity Targets Before the start of fiscal pressures, some fund managers seek higher returns cash reinvestment environment of low interest rates in certain high-risk assets is still considered a safe investment. Many of these songs proved to be illiquid during the crisis. Therefore, the agent of the lender trying to increase the reinvestment of cash overall liquidity conditions deteriorate. Relations night cash reinvestment changes liquidity in December 2008, but in some cases, between 20% and 30% compared to before the crisis about 10%. In December 2008, the improvement of relations allocated to the assets of maturity, reinvest in new businesses and, in some cases, the support of sponsors and underperforming asset sales. In the future, some companies are pointing to one of the highest ratios of liquidity during the night, the asset value of the Fund 30 % -50%.

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Greater Counterparty Focus Beneficiary agents and lenders are more concerned about counterparty risk and exposure of the day, the levels before the crisis. An agent of the lenders said part of its operations, the importance of diversification of counterparties. The loan officers that their concentration limits credit presence are generally not be charged with a significant loss of capital reinvestment. However, due to the dramatic reduction of the concentration limits of redemption after the crisis of the largest counterparty risk by the size of the company's investment books. Therefore, the fund manager can afford new investments involving exposure to these opponents.

Controls over Commingled Accounts The loan officers reported more control, reinvestment of hybrid capital in 2008 as emerging risks. Specific mutual funds tend to have higher levels of mobility, for example, about 50% of the net value of the company is a significant mixture. Some managers of cash collateral reinvestment funds also implemented controls to limit or delay the cash rebate applies only to the normal curriculum (i.e., borrowers repay the money), so that recipients can redeem cash redemption the recipient of a loan to keep the time or at the beneficiary owner will be fully redeemed in kind. Loss of cash collateral reinvestment Fund suffered losses between practices to prevent such losses in the entire investor base, to ensure an equitable distribution while allowing shareholders to redeem vertical slice funding investments.14 in some cases, these concerns about the effectiveness of controls, including the time of the fairness of its application has been on lenders and realtors dispute important theme of the review the importance of control of the company to protect the legal and reputational risks.

RISK MANAGEMENT CHANGES ASSOCIATED WITH MONEY MARKET MUTUAL FUNDS Reviewing its sponsorship funds sufficient cash reserves to prevent extreme events of the tail, then none of these events, is typical of the financial crisis, some incorporated contingency funding plans to support FMA and / or companies in September 2008 10th a kind of stress test during the month. Some developers say they check their funds FMA assumptions reliability in extreme cases. Many companies say they are focused on their liquidity levels, improve emergency plans and several sources. FMA crisis has highlighted the need to pay more attention to the management of

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investment funds and stable value of the net assets (NAV) 0.15 events during the crisis, but also the importance of transparency for investors to enhance the portfolio of leading practices, especially if the company has a stable future shareholder net asset value.

Adequacy of Liquidity Buffers A great patron, FMA is often in their net liquidity before the crisis about 10% of total assets followed closely by 25% -35%. This is consistent with the general trend of the funds to improve its liquidity profile.

Contingency Planning Before the crisis, part of the share capital of the company to support the emergency plan funding (PFP). Additional funds support their PCP September to October 2008, before there is little or no reference. If the above approach, the Sponsor does not expect the franchise and reputational risks associated with FMA game and its businesses, and the establishment of the liquidity of the business needs of extent of general provisions.

Proposed Regulatory Reform Section 2A -7 and money market funds with the rules applicable is to the study in the UK. These changes are designed to strengthen the resilience of the capital to withstand market volatility in the short term, investors, and provide greater protection. The amendments require funds to maintain a portion of its investment portfolio; can be easily converted into cash instruments to reduce exposure to long-term debt, and restrictions on the investment of the highest quality standards. The amendment also allows you to check the break the buck suspend redemptions allow an orderly liquidation of fund assets.

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DRIVING FORCES OF INTEGRATED RISK MANAGEMENT

Based risk management has become an essential part of business practices to identify, analyze and control the causes and effects of uncertainty and risk in a society (EIU, 2007 years). Today, companies have recognized the risk management and the interaction between them, only known risk or the importance of easily quantifiable. Even a seemingly insignificant risk possible, these and other events and conditions cause great harm. Risk literature and mass media concepts, such as strategic risk management, integrated risk management, Enterprise Risk Management and Integrated Risk Management, are to clarify the use of a comprehensive risk management organization. Remove this way, "silo ", in which a variety of concepts of risk management and clearly in favour of risk management in the organization to create value.

INTEGRATED RISK MANAGEMENT Financial institutions use the concept of integrated risk management as the technology, taking into account all the risks, an open system, as an organization, in addition, some of the methods that try to optimize all (Miller 1999). We believe that risk management (IRM) is a clear and systematic approach to the management of all risks from the point of view of the entire organization. Assumptions MRI should be included in the risk management system of the organization and management system. This should be a tool, a communication channel, and adapt to the specific procedures and components of the management system of the organization of the rest. Shearson (2006) indicated, MRI is a framework for the success of the organization, because it solves the risk across different levels of the organization, including strategies and tactics, including the opportunities and threats. Organizations have long been known as the implementation of various aspects of integrated risk management. Identify and prioritize the risks to treat the transfer of risk by insurance or other financial products, was also a common practice, as well as contingency planning and crisis management. What has changed, starting with the period 1999-2000, a comprehensive treatment of a number of risks, improve risk management, management responsibilities. Even if significant progress is not the practice of organizations in different sectors and different uniforms, the overall trend of risk management is characterized by a number of driving forces. First, there is a greater recognition, more and more varieties, organizations run the risk of interactions. Hazard risk actively managed long. The importance of financial risks has increased in recent years, especially in the last two years. The new risks and changing business environment has also emerged (e.g., the increasing globalisation of risk, information, e-

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commerce and the increasing reputational risk, as technology advances). Recently, awareness of the operational and strategic risks has increased, especially because many cases destroy their dynamic business control mechanisms or a lack of knowledge, lack of organization. Another driving force is the growing trend to quantify the risk. In the progress of technology and the experience was easier to quantify, even rare and unpredictable risks, have always been difficult to quantify. Organizations have become very willing to share with others who are not direct competitors practices and greater efficiency. Overall risk management is another important driving force. Common practice and risk management tools, a variety of organizations and shared globally. A facilitated the exchange of information technology, but perhaps more importantly, because these practices are transferred between organizations. The attitude of the organisations risk is another strong point. Today, defensive posture move towards awareness of the risks of opportunism and the potential risks of creating value. Although the case to avoid or minimize the risk that at some point some organisations still legal strategy, but also have the ability to share, store and use these risks depends on the particular organizational skills, actively seeking other risks.

IMPLEMENTATION OF INTEGRATED RISK MANAGEMENT Integrated applications of risk management can generate a management system standard risk organizations welfare is not available. In February 2007, around the world about their approach to management and risk major challenge and opportunities in this regard, the Economist Intelligence surveyed 218 executives. Respondents from different sectors and geographic regions, such as Asia, Australia, North America and Europe vest. Represents approximately 50 % of the annual income of more than $ 5 million in the company, all respondents are in their business in the field of management decisions influence or strategic liability risk, approximately 65% were senior managers or supervisors. Identify the most important in your organization to strengthen risk management issues internal and external factors, the EIU survey respondent first mentioned greater commitment, risk issues the board, and was the most the attention of regulators. Complexity increases is another important internal factor. These complications are value chain, the events of recent risk (such as a profit warning, fraud or product recall), and the companys risk management model. As noted as one of the factors above all others: to protect and enhance the reputation of the respondents were the main objectives and the interests of risk management. This finding emphasizes the nature and scope of the risk management of major changes. Ten years ago, we could have the most popular answer to this problem was to avoid economic losses, but now this fourth option appears moderate. Instead, it seems a consensus more; the current risk management

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proposed is not only a tool to protect the company against the loss, but also play a role in building the brand image and presentation good customers, partners and other (EIU, 2007). The implementation of the risk management framework, you can also identify some of the obstacles. While recognizing the functions of risk management, investment in recent years has increased, respondents believed they face major obstacles, lack of time and resources. This may be due to the following response, which is difficult to identify and assess new risks and responsibilities of risk management is not sufficiently clear. Intends to implement the organization of integrated risk management should be run as a personal project that requires clear objectives, success criteria, no time and resources, as well as monitoring and control of the implementation period implemented. First, there must be a demand for spiritual power, based on the expected performance of the evaluation system of risk management.

EFFECTIVENESS OF INTEGRATED RISK MANAGEMENT The performance evaluation and risk management can be demonstrated that the benefits of using the system, the cost of implementation were difficult to prove. Check Billota McGrew (2000), benchmarking is difficult on several factors. An important factor is the program interventions risk management can change the way the results, we cannot be separated, and therefore cannot be difficult to escape. The second factor is that the response bias, individuals tend to underestimate or overestimate the risk has led to interventions may be ineffective or too much waste. However, in establishing the overall performance factors of risk management, it is necessary to clarify the terms; it is recommended to evaluate this performance. Many authors believe that the objective of risk management is to achieve their goals more effectively support business development. On the management concept of efficiency of risk to explain such an approach is necessary. This is related to the efficiency and effectiveness of conditions, but with a wider range of meanings. Revealing different effects, effectiveness and efficiency of the effect of the intervention, this term was originally in medicine Cochran (1972). Effectiveness of the application describes the flow of resources to generate output with a minimum of waste. Efficiency, on the other hand, it is not only the relationship between the input to the output, but the extent to produce a measurable result. In terms of management, efficiency refers to do the right thing. Peter Drucker in the book the effective implementation (1967 edition) reminds us, saying: You can learn and you must win efficiency is an important issue. Efficiency and effectiveness are often considered synonymous, but they mean different things when applied to the management process. Efficiency is doing things right, but effectiveness is doing the right thing (2006 enotes.com years). A third related measures can also be defined, namely effectiveness, describing the power to achieve the desired results, as measured by the standard definition of the goal. Effect is measured on the

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extent of producing a beneficial effect and effectively treated, in the ideal case, in the case of routine in the area of the corresponding measurement. These concepts form a hierarchy. If the result is not satisfactory, it may have no effect, which is a fundamental requirement for efficiency. Effectiveness and efficiency of the relationship between light is measured if the actual and expected results (outcomes) of the target (Shearson Murray and Webster, 2005) are compared. Efficiency means that you will get effective results, but fully achieve the required objectives. For benefits, the use of resources creates a clear result, but the results do not meet the requirements. The effectiveness occurs when actual results widely to achieve the desired objectives. Obviously, the performance of risk management should be based on efficiency and effectiveness rather than efficiency to determine because the primary risk management objective is to maximize the achievement of these objectives. Another argument is the difficulty of quantitative risk management in the easier to measure the effort organizing process, generally. EIU study (2007), time and financial resources and lack of management support results are significant barriers to the implementation of integrated risk management. Thus, due to the current financial crisis, more and more attention of an organisation is on the implementation of risk management. Therefore, the study High Performance in the same period of risk management, published in 2009 by the growth of Accenture Management Development investment risks, 31% of respondents said that discussed and 23% said that growth in the next six months.

Table 1. The impact of the financial crisis on the investment decisions in the risk management development (Source: adapted from Accenture, 2009)

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Regarding the potential benefits of the risk management investments, 48% from the interviewed ones appreciate that the investments growth in the risk management raises the profitability and sustainability, 37% consider that the capital assigning will improve, 27% that the crisis can be anticipated by means of the development of the early warning capacity (Accenture, 2009). The Accenture study is based on responses from more than 250 executives involved with their organizations risk management capability from entire world. One the other side, the ability to demonstrate the return on investment on the risk management effort is more than ever important as shows the survey conducted in 2008 by the Federation of European Risk Management Associations (FERMA) in collaboration with AXA Corporate Solutions and Ernst &Young across the 555 respondents representing companies from Europe. The survey revealed a continuing progress in managing the risk in the majority of European companies. As a conclusion, the recent studies showed that the practitioners recognise the necessity of a risk management and its contribution to the increase of profitability. Also, it is worthy to mention that the investments in improving risk management increased and continue to increase, as the specialists indentified the difficulties standing in the way of a successful risk management and are looking for means to effectively integrate it in their organizations. The results of the recent surveys (Ferma, 2008; Ernst & Young, 2009) have shown the organizations need an instrument which ensures conformity and to which they refer when internal checking is done. The keys to making this work include an aligned scope, coordinated infrastructure and people, consistent methods and practices. In this context, the importance assigned to the standards that establish the general framework for implementing an integrated system of risk management is expected to grow.

CURRENT TRENDS IN RISK MANAGEMENT STANDARDIZATION The international community has developed a great number of documents in some way related to the standardization of risk management. These standards cover the general guidance for risk management, the terminology, requirements and tools. The International Organization for Standardization (ISO), together with the International Electrotechnical Commission (IEC) is the leading organizations in the development of international standards (Avanesov, 2009). Some national standardization bodies and nongovernmental organizations have also contributed to the development and use of standardized approaches to risk management. The acknowledged standards for general guidance in risk management are presented in Table 2.

Producer

Name

Scope

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ISO/IEC

ISO 31000:2009 Guiding Principles of Risk management ISO/IEC Guide 73:2002 Risk Management Vocabulary Guiding principles for employ in standards ISO/IEC Guide 51:1999 Safety elements Guiding principles for their insertion in standards

ISO 31000:2009 presents generic guiding principles on risk management. Any private or public corporation or individual can employ this. This benchmark is not limited to any specific sector and is not designed for employ as a certification criterion. ISO 31000:2009 has been obtained as a replacement to the existing benchmark, AS/NZS 4360: 2004 (in the form of AS/NZS ISO 31000:2009). ISO/IEC Guide 73:2002 Standards writings ate facilitated by Risk Management with generic definitions of terms related to risk management. The main intention of this is to play a role to mutual understanding among the IEC and ISO members instead of provide guiding principles on practices of risk management. In 2009, it was re-amended along with ISO 31000:2009 Risk management. ISO/IEC Guide 51:1999 cited to any safety facet associated to people, asset or the environment as well, or an amalgamation of these. The more particular approach of this guiding principle facilitates the risks analysis of absolute products or services life cycle. This Risk Management Standard refers to the outcome of work by a group established from the significant risk management firms in the United Kingdom (IRM, AIRMIC and ALARM) on the basis of perspectives and views of an extensive array of other expert and professional entities with more interests in the practices of risk management, at the consultation time. This standard recommends a procedure through which the risk management can be carried outs, and it is not prepared for employ as a criterion of certification. AS/NZS 4360 (first ed. 1995, second ed. 1999, third ed. 2004) is also a generic guiding principles for the practices of risk management with the intention that it applies to every kind of firm. The standard outlines the factors of the process of risk management and illustrates how to establish and maintain risk management systematically in a firm. AS/NZS 4360:2004 represents the base for ISO 31000:2009.

IRM/ AIRIMI C/ ALARM, London, UK

Risk Management Standard: 2002

AS/NZS AS/NZS

4360:2004 Risk management

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ON Rule series on the practices of risk management reflect a collection of complexes guides with various goals. This guiding principle refers to the basics and terms (ONR 49000), on Risk risk management (ONR 49001), guides for entrenching in the N ON management for management system (ONR 49002-1), methodologies and Rule series firms and procedures for assessment of risk (ONR 49002-2), systems management of crisis and business continuity (ONR 4900023) and the basic necessities for risk managers qualification (ONR 49003). Essentially, the present ONR is at the level of ISO 31000 Risk management Principles and guidelines. Table 2. The most important national and international standards for risk management

Table 2 standards can not only focus on specific categories of risk management, but provides business risk the most comprehensive and complex, because of its generality. The choice is their application in organizations, industry, company or project of public and private management and dissemination of information in the world the possibility degree. As mentioned in Table 2 rules are directly related to risk management, understanding of the organization of many different aspects of its operations on the rules of risk management. Among them, we find that the ISO 9000 quality management series (especially the more recent ISO 9004:2009 management of sustainable success of a company - the quality management), ISO 27000 series of security management of information, standards, information on health and safety (OHSAS 18000). Indirect, are applicable to the activities of an organization are associated with certain risks. In recent years, companies are faced with some of the different areas (security, IT, marketing, etc.) and the environment of the internal or external company, strengthen its management processes (see Figure 1) and risks arising from the rules.

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Fig. 1. Different risks and standards facing an organisation (Source: adapted from Nikonov & Kogan, 2009)

Nikonov and Kogan (2009) that although the categories of enterprise risk management, the risk management structure is the same everywhere, a single standard to reduce the "risk criteria too" risk. To eliminate a large number of rules generated by redundancy, representatives of the Association of European risk management challenge an ISO standard, because the idea has been advanced to the needs of more than 10 years. Instead, they promote the guidelines, which are ISO terminology, less severe than the standard idea. Meanwhile, standards and standard documents (guidelines, frameworks, etc.) varieties have been developed to address specific areas of risk management, and have been widely accepted. In Europe, with the name of risk management standards appeared in 2002 a panel of the largest risk management organization in the direction KINDOM United States: Institute of Risk Management - IRM, the Insurance and Risk Managers Association - the Forum and AIRMIC country risk management in the public sector - the police. In addition, the rules are different in areas with other experts in risk management, interested in a long period of consultation and exchange of views on the results of the collaboration. European Risk Management (FERMA) Associations Federation took the risk management standards, 2002 was published in England. This pan-European risk management best practice standards localized versions can be freely provide risk managers.

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STANDARDS OF RISK MANAGEMENT The risk management standard terminology used is defined by the International Organization for Standardization (ISO) Guide Paper 73 Risk management - Glossary - standards established in the 2002 guide. Risk management standards are not dedicated companies and public institutions, but can be used for any type of activity, long term or short term. Benefits and opportunities support not only in the context of the event itself, but also the multitude and diversity of stakeholders ideas. It is known that the value of risk management in the positive and negative aspects of risk is. This standard takes into account two points of view - opportunities and threats. This rule does not provide a specific solution or build a certification process has a mission. By using it, companies have a tool to measure the management framework applicable measurement and functionality risks. In MRI / AIRMIC approach risk management / ALARM is considered the strategic management of the central parts of each organization. On behalf of the means by which organizations involved in the activities of each individual for the purpose of benefits, the risks associated with their activities, but also for all activities of the portfolio. Focus on the purpose of effective risk management in accordance with this standard, the identification and treatment of these risks. The goal is that all activities within the company an extra added value. This will result in the understanding of the organization and positive and negative affect factors increase the chances of success, but also reduce the likelihood of failure and performance of the uncertainty of the business. Standard risk management supports the idea that risk management should be a sustained and stable development, according to the strategy of the organization. This should take into account all the risks that may affect the activities of the organization, based on past experience, current events, and future estimates. Risks within an organization can be generated by internal and external factors, but we must attach great importance to be attracted by the fact that there are many specific risks, which can lead to from internal sources and external. Furthermore, it is suggested classified as a strategic, financial risk, and operational. This standard is the only directly support the need to develop and support the human resources of the company and the knowledge base.

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CREDIT CRISIS LESSONS FOR MODELERS

A recent article in the four Federal Reserve economists, "Understanding the subprime crisis," provides what is available to the analyst in 2005 and 2006, the information indicated in the corresponding period of the loan and subprime securities most toxic segment investors false optimism is based on the following points: First, strong fundamentals are being considered. The subsidiaries are primarily a financial services company with good reputation in this market has evolved to become a lender of loans to replace small enough, in the 1990s. Lenders have security for loans, indicating that high-risk borrowers to improve credit score FICO score average quantitative model based on the increased use. In addition, recent subprime mortgage securities results showed more stable than similarly rated corporate bonds credit. Auto insurance, improve transparency and most reputable lenders score credit usage increases, it is expected that the performance of high-risk mortgage securities remained strong. Second, subprime securities must be less than the first mortgage interest rate. First mortgage borrowers have a tendency to roll over their loans and pay the existing loan when interest rates fall. This is the importance of fluctuations in interest rates investor questions, increasing the interest rate risk of these securities. Subprime loans have shown a rate of more stable prepayment, refinancing is often a low correlation with the index, pulmonary heart disease market interest - individual borrower's financial difficulty. This coin is a large group of independent borrowers from scattered sources. In addition, nearly 80 percent of subprime mortgages prepayment penalties, the other two by reducing the likelihood of mortgage refinancing if interest rates fall. These features reduce subprime mortgage securities received as interest rate risk, so it may be a safer investment than a mortgage with the same credit rating. Third, we hope that the subprime housing market in order to minimize downside risk. It is often used to evaluate these data from 1998 values. Data prior to 1998 are not considered to be most relevant, since the changes in the industry sponsors and securing the loan process more automated. Unfortunately, this period did not include a recession, does not contain support for a period of falling prices in the country. December 2005 Citigroup report quoted saying: "National Decline in home prices appears remote risk of HPA also dates back to 1992 in the United States never negative." Appreciation of housing prices (aka HPA) all the way back in 1992 has not yet appeared negative. What can go wrong? This story seems very familiar with the basic knowledge of the general insurance industry in the late 1990s, the bottom of the market weakness that happened. Insurers and brokers sought to re-buy the book means that future earnings could be better than the historical experience losses. Also, it expected to change in processing claims prediction method classic triangle actuarial loss to reduce future development. Management Team

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announced that the new division to diversify its investment portfolio and reduce risk of loss. Wall Street and the insurance industry have tended to underestimate the risks, but the bankers seem to have found a way to get to zero or two to end their wages, while doing so. In the future, what can you learn from mistakes for those trying to quantify the risk to life? First, the recognition accuracy of this model is limited by the accuracy of the hypothesis. Complex models, which can give a false sense of security, withholding evidence, it seems that may depend on one or two basic assumptions. Using assumptions based on data ensure that the time series of environmental stress, it is possible. If the insured risk model that was produced from 1998 through 2000 combined ratio accident is a very low probability, it is not a realistic model. Second are the main obstacles to test the hypothesis. In most modeling exercises insurance risk between departments and other risk correlation assumptions between the tails drive results. These correlations must be transparent while the model should be able to point to test the correlation between increased risk factors. Each new market crisis shows that in stressful environment correlation is much higher than the historical average would indicate. Finally, the data is used to understand restrictions and identifying the resulting uncertainty. 5-10 years of data modeling provides limited information PML 100 years. Many analysts believe that subprime mortgage securities from the 1998 data is far from ideal for use, is not representative of all possible cases. The historical data backed securities subprime if prices fall to make a reasonable estimate of potential losses. However, his biggest mistake was to underestimate the United States declined by almost 20% from 2006-2008, the largest metropolitan area pricing possibilities. This error indicates that quantifies the probability that the ability to quantify the distance is more difficult. To illustrate this point, Nassim Taleb makes smart turkeys are raised on a farm in his book "The Black Swan story every day of his life, when a turkey farmers see that it is the Federal Reserve. Based on this experience when Turkish peasants to leave the farm to see the day before Thanksgiving, he saw no reason to worry about this great underestimated the risks from Turkey by farmers for past experience has not indicated Thanksgiving done. In order to ensure that the end user model predicts trial turkeys do not make the same mistake, the model must remain humble documents based on their limited data model to provide a clear summary of the assumptions and estimates major uncertainties. Do not confuse the real world results of probabilistic model.

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KEY SUCCESS FACTORS FOR IMPLEMENTATION OF RISK MANAGEMENT STANDARDS IN ORGANIZATION

The enforcement of a risk management structure brings the different advantages of the firms. The risk management, in the approach of IRM, AIRMIC and ALARM (2002), shields and adds value to the firm as well as to its main stakeholders, supporting the main objectives of the firms by: Facilitating an organisational atmosphere which provides the likelihood of carrying on the practices in a considerable and more controlled way; Ameliorating the procedure of making decisions, planning and making as a preference, by a comprehensive and structured realisation and know-how about the activities related to business, the instability and opportunities and threats of project; Making efforts to a well-organized allocation of the resources and capital of an organisation; Minimising the instability in the insignificant business venues; Protecting and enhancing the organisations values and overall reputation; Improving the efficiency of operational activities.

Peter L. Bernstein Book of God: the remarkable story of risk (1996), the author of that risk management is a necessary and useful, but cannot absolutely guarantee the success of the organization. He warned against restrictions, risk management and the possibility of increased risk, rather than management. Bernstein said that in the stable, we believe that stability is the natural order of things, and forget the stock market crash, hyperinflation and massive price movements. If you expect to happen, do not rely on our risk management process. Although this book was published, there were no signs of the financial crisis, and his claim was confirmed at the beginning. Finally, Bernstein warned that the security risk management process in place that can lead us to take risks, you should not have. Similarly, the application of a risk management policy of the organization benefits of the product but can also be a failure in the process, if you do not follow a set of principles, or whether some of the key elements of success ignore. The benefits of which is the image of the first position, in order to improve public relations and stakeholders and clients of the organization to improve confidence. In general, the standards of risk management that combines the best elements of existing standards in the field and the flexibility and adaptability of the method and provides related aspects of risk management. In risk management, the rules of law, because they require the consensus of all stakeholders, not only represent a point of view. Rules for the Implementation of the risk management organization, the parties could speak a common language and communicate more effectively. More specifically, the ISO standards process are appropriate, formal and the most current set of 60 directly or indirectly related to any type of risk (FERMA, 2007 years) standards. It could also be a framework to help develop risk awareness

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and education. Finally, the standard professional risk management can be seen as recognition and more formal and credible benefits compared to other synchronization. There are some principles and best practices can be applied to ensure successful risk management. Risk Literature (Dembo and Freeman, 1998) discusses some of the critical success factors that can affect the effectiveness of risk management. The successful implementation of the management of critical success factors effective risk include: administrative support, risk management in the decision making process, indicating the value of the organization to create controls and procedures and the effectiveness of risk creating a common language. Although they do not mean a standard adopted, but implementation of the risk management system in general, we can say that the difference between these two cases is secondary. The basis of the application of risk management standards is what these criteria are, what they want and what it means to adopt a clear understanding. Otherwise, the company is not able to achieve the goals set in the concrete implementation of these goals and measure progress. Risk management should be institutionalised, integration and business model of the company. Effective solutions and integrated risk management deviate fragmented scattered in many existing companies. Risk management provides an overview of the company, allowing the identification and understanding of the various risks, and this understanding into the growth engine of the company. Risk management is to support, not suppress entrepreneurial businesses. If risk management and poor coordination between performance management, managers cannot fully compensate for the results of risk / return decisions. Head of Risk Management in a higher frequency of reporting interest rate risk. They are also more likely to have standardised reporting procedures of risk. Management support and leadership of all the criteria in risk management is a critical success factor. Not implement a risk management framework common reason is the lack of support from senior management. The implementation of the integrated participation of risk management in the case management team is due to the difficulty of their execution, respectively, as can be proven benefits of using reasons of system implementation costs. The only place that can be used to measure the performance index is a system of disaster risk management and security risks. Index risk management, RMI, gathered a group of internal risk management, the results of disaster risk. These reflect the organizational structure, development and institutional capacity of the measures taken to reduce vulnerability and losses, to prepare for the crisis and restore effective. Risk training and experience of the director, but also affect the success of risk management. An international standard for applications requires a degree of capacity (the qualified person to the right), based on providing opportunities for education, training and experience appropriate and relevant. Information and data quality is the most important. Effective risk management is based on the information provided. To deal effectively with specific types of risk depends on quickly

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and continuously collect, aggregate information from different sources and awareness. Management needs the right information at the right time the right size, to assess risks and take action. Most experts (Shearson Artto eagle, 1999, 1997 ;) agree, one of the critical success factors most important affecting the application of effective risk management is often a lack of appropriate risk culture and the most sophisticated.

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STRUCTURED FINANCE, RISK MANAGEMENT, AND THE RECENT FINANCIAL CRISIS

Structured finance is frequently referred as the primary reason of the recent financial crisis. However, as the author asserts, it was the outcome of inadequate implementation of risk management system, agency issues in the securitisation market and poor standards of pricing and rating, among other reasons. Potent measures to initiate are recommended by the author in order to prevent a re-occurrence. Structured finance comprises all the relevant sophisticated financial arrangements that help to resourcefully refinance and prevent any economic exercise beyond the range of traditional financial tolls, including equity and debt. Some of the examples are Asset-Backed Commercial Paper (ABCP), Credit Default Swaps (CDSs) and Collateral Debt Obligations (CDOs). The appearance of structured finance has modified the contributing part of banks and the functional activities of financial markets as well. In the UK, at present the structured finance is an extremely imperative activity in the businesses that has comprehensively changed the connections of lenders, investors and borrowers. Structured finance is generally considered the main cause of the recent financial crisis. However, as this article will show, structured products and complex funding itself does not lead to financial crises. In fact, it is the institutions involved in structured finance policies and practices, largely caused by transmission and management of risk in the world, the last crisis. Some of the big banks failed, as governments and central banks had to save many other financial institutions. Despite these bailouts, the purpose is to protect the financial markets in the short term, will not solve the underlying problem. In this article, we emphasize that good risk management can restore investor confidence in the capital markets play an important role.

STRUCTURED FINANCE Structured finance is a multifaceted concept. Through the years, has been associated with derivatives, and that the economy and financial markets on a relatively minor factor. However, structured finance has become an important factor - though hidden - since the 1990s, the economy and the increasingly important topic of discussion since the beginning of the most recent crisis. Financing transactions structured financial products has produced one of the organizations retail credit and financial markets are beginning to be understood and interpreted in several significant impact. For example, structured finance operations liquidity and credit risk management has improved. Changed in recent years, these effects have complex consequences.

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Structured finance, greatly affected financial products. She gave birth to increasingly complex types, especially those involving credit risk of the securities, such as product creation CDOs. These financial products, the introduction of advanced and sophisticated mathematical tools and design contracts require security and cooperation partners from different disciplines. They also require high computing power and large databases authority. Because of their mobility, these products are involved in the regulation of financial markets and monetary policy history in traditional management methods. The motivation for the creation of structured finance is mainly through the use of credit derivatives (CDS, for example) and the securitization of bank loans, credit risk transfer to investors. For example, bank loans, trust funds, used to transfer credit risk of banks using a variety of different types of investors, such as pension funds, industrial and service companies, investment funds and other structured products sold bank. Since 2000, the CDO market is growing very rapidly. Banks are the most active in these market players, although insurance companies, pension funds and mutual funds are increasing. With hedge funds and their needs, the growth of high performance, providers have improved their ability to transfer credit risk, especially in the higher risk in the lots (or portions of shares) of structured products. Credit Bank securities risk is regulatory arbitrage motive under Basel I, because they encourage banks to sell their assets at risk. With the credit risk of the new accord (Basel II) regulatory arbitrage motives become less important, although investment products regulated by DCA standards distort the allocation of bank capital.

BAD RISK MANAGEMENT After 2001, there is a large market, rapidly changing financial, Bank of America and other retail establishments to expand credit risk borrowers (subprime), the transfer of these risks in the global financial markets through risk transfer credit through securitization tool. CDO these mortgages are the instruments of transfer credit risk most common structural. Rating AAA rating agencies initially assigned to many of these structures is clearly inappropriate, since many of these products are returned when the related loan default secondary from 2005. Subsequently, the rating agencies downgraded many of these structured products. At that time, however, most of the damage is done. During this period, the use of complex financial instruments such as asset-backed commercial paper and collateralized debt obligations, the asset securitization investment will be of low quality, the actual default risk is much higher than conventional bonds AAA. The crisis has accelerated as banks under pressure from financial markets, increase the supply of mortgage credit, high-risk assets at low interest rates for a while to generate higher returns. This new presentation is very profitable, and encourage shareholders debt mortgage bonds issued by lower yields CDO second generation. This is the first generation of securities and mortgage-backed

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securities (MBS) increased demand. When subprime mortgages began to default, these financial products spread damage to international markets. The financial crisis undermines the real economy and the monetary economy (unemployment) (under the consumer credit and commercial enterprises, even if the central bank prime rate is very low). It has weakened financial institutions and rating agencies, which led to consumers and investors confidence to take risks.

RISK MANAGEMENT AND STRUCTURED FINANCE There are four major risk management issues structured finance market. First, contracting incentives under asymmetric information: banks and mortgage brokerage firms have no incentive to be vigilant and monitor the borrower's risk, as there is no danger moral right or best a part of the terms of the contract have been securitized loans. The same problem, there are insurance companies and other market participants in a diversified portfolio of risks and manage their funds through securitization incentives. The potential transfer of results to the market also explains the lack of monitoring of incentives. Adverse selection was also present, some of a bank trust BBB (minimum set of qualifications CDO) product sales, especially BB. Second, rating agencies evaluate the product structure: In the process of securitization, an investment vehicle (SIV) special purchase long-term assets, such as loans and insurance contracts, financial and ABCP securities, CDO assets as support. With high rating of a rating agency is essential to making money. When the credit crisis began in 2007, asset-backed commercial paper was degraded and SIV could not stand corporate documents. This led them to look for their sponsors (investment bank) financing. This led to the downside, many investment banks and caused a liquidity in many markets such as asset-backed commercial paper market in Canada, which is the subject of these products in the U.S. (In fact, some believe that the shortage of funds, involved "Montreal Protocol" pollution, of which approximately 6% of the exposure.) In a more complex level, CDO pools to make money through restructuring loans and sell them as a batch of bonds. The tectonic activity when the benefits outweigh products through a high credit rating to obtain a high market. However, the problem is that it has become increasingly difficult; there are no good data to simulate these complex organisms asset evaluation. This is a very difficult market participant to monitor and reproducible classification of these products, since data are not available. Third, rates of complex financial products: Another reason for the current crisis is that these advanced tools are often too low and does not reflect their true risk. There is also a component of systemic risk when market events affecting other systemic risk markets. Difficulties of assetbacked commercial paper, for example, many financial market managers transfer their accounts in the market, resulting in higher prices and lower yields. These effects are magnified due to the lack of transparency. ABCP in the case of Canada, many investors do not know if these product

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warranty, including the UK subprime or not. This has led many investors, such as pension funds and mutual funds, with good assets, which further reduces the prices of the assets sold. April. Structured Financial regulation: It is important to note that currently only applies to banks and investment banks risk oversight. Pension funds and hedge funds are not regulated. Basel II provides some reason, as it significantly reduces capital goods AAA quality supervision required. Banks, and then by attracting new AAA quality assets and seller motivation, these structured products are rated AAA by the rating agencies, assume unnecessary stress. AAA credit rating of these products also affected pension funds, corporations, investment funds and hedge funds, the insurance purchasing behaviour, especially because the same amount of paper work pay lower interest rates, the central bank has reduced its interest rate targets.

ROBUST LEVEL OF RISK CAPITAL Observers of the market have never been as sceptical on the capital standing of financial organisations as they are now. As the third quarter profits and earnings was realised by The Hartford in 2008, its stock price declined almost 50% when it showed the loss of 2.6bn dollars on the quarterly basis. Most of the people accept as true that this was led by its massive level of failure to induce the market that it was adequately capitalized to survive the financial crisis.

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The above mentioned table shows some of the leading companies in the capital ratio of up to 20 or more, which means that the dollar may be capital assets of more than $20 profit. Wall Street firms and other financial groups operating high debt ratios, and at the same time, they believe they have enough capital generated based on the measurement of internal models of risk capital. These internal models generated number is strong enough to withstand the financial crisis is happening today corporate credit accidental loss, such as? So, what led to the financial crisis, financial institutions, and lack of capital?

WHAT HAS CAUSED THE PROBLEM? In this "hurricane" of the financial crisis, insurance companies usually have a little better than investment banks (with some exceptions, mainly written by insurance companies subsidiaries of American jobs, but are not regulated as insurance). Credit crisis affected more than the edge of the insurance industry. One reason may be because they are based on different regulatory framework. Unlike the regulatory capital requirements of bank insurance, the UK regulators

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imposed (RBC) venture capital, which requires insurance companies have minimum capital requirements, regulatory agencies the right to calculate the different factors. Companies need to have more than 150% of the capital ratio (total capital exceeds the minimum after a slight adjustment), in order to avoid regulatory action. Insurance companies are held by two to four times the minimum requirements for RBC Target Position. The regulations allow the insurance industry in a low level of capital in the online industry. Although the risk capital, based on U.S. crude oil and one size fits all solutions of the basic principle is that capital should be mature enough to make a firm future obligations. However, the investment bank is not regulated as insurance companies in the United States. Market credit default swaps swap (CDS) was before the financial crisis unregulated. Bear Stearns, Merrill Lynch, Lehman Brothers, Washington Mutual Bank (Washington Mutual), Fannie Mae and Freddie (Freddie Mac) and other companies face the reality that each bankruptcy or sale (government or other companies). This is mainly due to the difficulties of capital funding gap. Insurance companies, but also the lack of access to capital in the current market pressures, there is a better fight against the expansion of capital, so far has been able to survive, while private sector solutions on the based solely depend on government assistance. This is because of the funding gap and the insurance of core business are healthy, so attractive to private investors.

MARKET PRICE OF RISKS Market price risk, if not in the depth and liquidity of the market commercial risks. Investors have to take advantage when they choose their own money loaned or invested. The margin can increase or decrease for investors and their risk aversion changes. Ultimately, this margin is redundant in the price of capital risk-free rate of the Company. A company to create value for investors, the economic performance of capital is greater than the cost of capital. We use a purely internal model (which is based on historical loss data) to determine the economic capital? To what extent market price risk capital has impact on the economy? It is defined as the standard is defined, or the amount of economic capital more popular, the insurance company must be such that it can absorb all losses horizon time probability 99.5% a year. This definition includes CFO MCEV and Solvency II principles. We study this level comparable market risks. In other words, the economic capital, defined on the real economy (e.g., in line with the market)? We compared the standard definition of economic capital by analyzing rated bonds in the market price risk. Evaluation Based on historical default and Moody transition probabilities, which simulates the distribution, in the study published in the loss. The capital has created an average loss of a year of credit losses) (99.5 percentile 50th percentile in the distribution, we also find the model with a horizon of five years and then compared the economic capital determines the

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market price of risk (as described above). According to this approach, the average historical excess spread failure in advance, which is the return line of the capital market was rated issuers Category A 9% of the capital cost of using implicit market to solve the economic capital of the analysis results are presented below.

The conclusion is clear. Economic capital is defined as Solvency II was significantly lower than the market of the economic capital implied. Even in a time span of five years (Solvency II provides one year) the failure of the EC internal market prices are still lower than the amount, but it is closer. We believe that there are some reasons for this difference: Historical data may have just a possible outcome, not the sample. Market price risk is unknown (as black swans and paradigm shift). Economic capital model may not have considered fully reflect the level of market liquidity risk.

If you take into account in the calculation of economic capital risks may cause the market price of banking sector capital is insufficient. If the industry rather than RBC, the definition of Solvency II risk capital today, we can expect in the future of the insurance industry to increase capital deficiencies and faults. Even if we can conclude that 265 basis points is the appropriate level of economic capital, the decision may include other factors, such as potential buyers of the funds or assets of friction costs and the costs of the tax, it is concluded that the big difference between the market price and Solvency II Risk should be defined to allow risk managers, the economic capital model adequately reflect all risks. We believe that the regulatory environment is more economical, thus promoting health capital industrial, economic is defined, according to the Solvency II should be a one-size-fits-all definition of improvement in the U.S. RBC. It's an improvement, should be revised to reflect the market price risk is a key factor, and should be taken in defining mature RBC Capital is a must.

LESSONS FOR RISK MANAGEMENT

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Why investors buy these products, why do you offer? Before 2007, there is little concern of structured securities, so there is no obvious reason for breach of contract. However, the environment of low interest rates, investors are increasingly drawn to provide a high rate of return on AAA structured products, resulting spreads narrowed. Although these products still offer slightly higher yields than those with more traditional short term, do not adequately compensate investors for risk. Price does not reflect these products embedded in systemic exposure. As mentioned above, the market has grown exponentially, banks charge high fees on the origin and structure of these products made huge profits. It is well documented that the rating agencies have made mistakes. They also have an incentive problem because issuers pay rating, and some suspect that these rating agencies as part of the subscription process. It is expected that regulators and central banks to be a problem in these practices. Many investors have lost money during the financial crisis because it does not apply the basic principles of risk management. Risk appetite has not been well explained in many companies, enterprise risk management is not well defined or used by the risk management policy has been supported by the makers of high-level decisions. Indeed, risk management in many organizations seem to have been cyclical, came only after the crisis has come to a complete. Underestimating the risk of default and liquidity of financial signs new structured products of poor risk management. Some of the products introduced in the years before the crisis, many investors do not have sufficient knowledge of the risks, especially because they have enough tools to evaluate them, and therefore, the same base evaluates these complex financial products, rating standards. There is no analysis of the tail, no back testing and stress testing of complex products without these risks. Risk management function has ignored many of the key decisionmakers, who appointed him to the credit rating agencies, risk analysis and incentive problems. Several lessons have not been documented. If the system structured finance, structured products, designers need to be more responsible. They have to maintain a large pool, partial sale, maybe the entire high school group, or even a fraction of the older age groups. This will give them a greater incentive to achieve the best risk management practices of credit decisions and get better sales mix. In addition, there should be more transparency slice structured products. As with any security, researchers and market participants should be able to replicate the composition of these products. Common data set should be used to study these products. Financing increasingly complex structured based on the effective management and dissemination of information challenges. There is a need for greater transparency in the credit markets, especially when securitized loans. There is also a need for greater transparency of the same by trust funds and pension funds and mutual funds and other financial assets held by the packaging.

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The evaluation of these products should also be more transparent. Any good researcher or conventional bond market investors to check the ratings, because data and evaluation methods can be played. The same rules apply to structured products, their price range. Institutional change in many countries, including the UK, there is a need to promote independence and reduce their vulnerability to international markets, especially in the United States. Agencies must understand the technology. Design, data collection, processing and communication technology cheap financial institutions provide an effective tool to copy and verify rating agencies to analyze the confidence from a variety of sources and packaging. These capabilities should be in any investor or group of investors. Canadian ABCP market will not collapse in a transparent market, only 6% of the pollution. For investors, the management and the board should rely more on risk management policies to make investment decisions. Their general data risk management, and consequently weigh the risk information. The Board shall be managed by the people who know the risk, in the exercise of its oversight, risk; risk management committee should be very active. The higher risk appetite should be defined, known and controlled by the Board. CRO (Chief Risk Officer or equivalent) should be given more power, rather than simply as a passive, analysis, measurement and risk. He or she is responsible to the CEO and the Board regularly. Some people even say CRO should have a veto over certain transactions. CRO office each business unit must be independent. All significant intercompany transactions, there must be a rigorous analysis of the data and the right price and product testing (value at risk, rather than VAR) model to evaluate. This means that risk management education investment for many investors with greater transparency and full disclosure of all exchanges play an important role. These proposals are difficult to apply to investors in the money market, has to handle many assets with a maturity of 30 days. However, risk management is most important for these inverters. Risk analysis of new forms of cooperation and transparency must develop an independent, no problem of incentives. Ultimately, more than is absolutely necessary due diligence risk.

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CONCLUSION AND RECOMMENDATIONS

There are many factors that have played a vital role to the present financial crisis. From this crisis, we can get a great deal of knowledge and experience. Though, in place of myopic concentration on tiny details about the present situation, we should focus on these basic problems underlying the present financial crisis as well as the crises in the past and future. In my view, the main question highlighting this crisis and most of the others is how to evaluate the advantages. The present crisis, more specifically, is the lack of fit risk, AU to report earnings, major level of reforms necessary to reduce crises in the near future is to make sure that that whenever we evaluate an advantage risk adjusted basis, AU. Currently, the firm reflects its advantages to outside audiences devoid of the adjustment of risk, and the financial statements of the firm do not show the risk magnitude for OSA as the firm is devoted to accomplish these advantages. Consequently, most of the groups, including lenders, analysts, credit rating regulators and investors, that are relied on the financial statements have the unpleasant revelation when a firm, the AM stable, lasting advantages soon reverse sudden disastrous damages and have been lucrative risk-adjusted, though, emphasises the level to which a firm, the advantages of taking risks OSA. Moreover, how to evaluate a utility firm generally affects how the firm makes compensation plan for the main staff to change a compensation system directly affects the firm AOS employees. Thus, a business that does not consider the risk factors that advantages of internal compensation plan is evaluated develops vital incentives to take too much risks. Conversely, when an evaluation of earnings compensation of a firm based on risk adjustment, is less incentive for employees is there to take too much risks, due to the increased risk does not by design lead to the likelihood of increased compensation. There is a vested interest of shareholders, creditors, taxpayers, rating agencies and regulators in the firm; the system of AOS compensation does not produce structural incentives for future for too much risk taking. The proposal for the profits calculation on the basis of risk adjustment would most likely require significant level of amendments in financial statements and accounting principles, though it is a difficult job to do. Furthermore, it is also probable to need considerable amendments in the companies mechanisms of payment that is also not easy. In the end, measuring the advantages on the basis of risk adjustment could be a challenging task. However, this effort of reform has the capability to weaken preferably perverse benefits for too much risk-taking and, consequently, trim down the probability of further financial crises in the future.

RECOMMENDATIONS

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To furnish helpful risks assessments, then, risk managers must take longer horizons into their considerations as well as take a detailed view of their risks. As instance, one-year horizons are extensively employed as measures of risk across the firm in enterprise-wide programs of risk management. Many financial service institutions that concentrate on one-year measures of risk across the firm want credit ratings that entail a very small annually likelihood of defaultsay, 0.03 percent. However, these approaches are not enough. A high target credit rating effectively implies that the company wants to avoid defaulting in all but the most severe situations. When a company intends for a high credit rating that is AA, it efficiently selects a likelihood of defaulting of about one in 1,000 in the future. However, as crises are more probable than that, there is a need of management to take implications of its decisions into consideration during crisis and have a comprehensive plan. Generally, the models of risk are not intended to confine risks related with crises and aid firms manage them. Historical data are used by the models and, mostly when employing risk measures like VaR, are most accurate for horizons that are numbered in days; and when employing such little horizons, crises emerge to be extremely unusually events. And at least for intentions of assessing the effects of crises and making strategies for them, an extension of the scope of risk models is probable to be precious for two main reasons: (1) as demonstrated considerably by events as the period 2007, financial crises can engage the unexpected extraction of liquidity from the markets. The lack of liquidity indicates that the companies are fixed with positions they did not anticipate to hold. (2) At the crisis moments, firms will frequently face losses and damages that surpass their every day VaRs, considerably undermining their positions of capital. For these two main factors, even companies whose trading is directed by every day VaR should conceive complementing their employ with measures. Moreover, financial crises also have complex interactions and connections among institutions and risks. Typically, the models of statistical risk take returns to be exogenous to the company and disregard concentrations of risk. However, if this approach is adequate for several institutions, it will not work for others that, due to their connectedness size or level, can distress markets prices and volumes as well. In fact, larger-scale financial institutions confronting with distress can be disclosed to predatory trading, specifically, trades made by others that have the consequence of amalgamating the losses. An instance is a state where traders take advantage from selling and pushing prices down so as to producing a fire sale. As a company experiences high level of losses, it may pull down prices for other institutions and make financial support more expensive. Typical models do not comprise these probabilities, leading to a noteworthy understatement of the positions risk during crisis.

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A little expectation is there for models of statistical risk that depend on historical data to confine such complex consequences. And instead of attempting to bring in larger complexity and practicality into their models, managers should look at complementing their dependence and confidence on models with tools. Through such scenarios, higher level of managers can expect the hazard created by intense events to the licence value of their institutions and establish plans for restricting to such harsh events. At odds with some present practice, analysis of scenario must be informed by the analysis of economy. This analysis obviously cannot thrive unless the higher level of management considers that the scenarios considered current severe threats and dangers. Most recent economic complications have persuaded some spectators that there are most important, maybe irremediable, defects in the system of risk management, and that these defects were central factors of financial crisis. This paper reflects the requirement to differentiate between defective evaluations by risk management and risk-taking decisions at the corporate level that, though resulting in the form of losses, were basically rational when were made. To assist in making this difference, it also addresses many different approaches that risk management cannot make the grade. Besides selecting the incorrect risk metrics and otherwise mis-measuring risks, management cannot make the grade to convey their risk evaluations successfully and otherwise give useful direction to high level of management and boards of directors. After that if the management has applied that information to find the risk appetite and strategy of the company, risk management cannot success to oversee risks properly. However, if risk management has been misguidedly addressed as the wrongdoer in most of the situations, no question is there that practice of risk management can be ameliorated by looking at the lessons from crisis events. These financial and economic crises have happened with high rate of recurrence that the conditions of crisis can be modelled. Moreover, when models achieve their limits of utility, institutions should take into consideration employ scenario analysis and planning that measures the events implications for their financial positions and continued existence. Instead of depending on the previous information and data, scenario planning approach must employ economic analysis to assess the potential effects of abrupt illiquidity. However, to support as a most important component of a companys strategy, the approaches of scenario analysis and planning that appears of it must be intensely entrenched in environment of a company and in the higher managements strategic thinking.

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