A methodology for actively managing tail risks and uncertainties
Abstract
Tail risks and uncertainties have a significant negative impact on financial institutions and the financial system. Their probability of occurrence is low (tail risk) or cannot be determined (uncertainty). One may believe that tail risks and uncertainties are unavoidable; however, this is too simplistic a view. Financial institutions and supervisory agencies can in many cases actively manage the likelihood and impact of tail risks and uncertainties. This active approach benefits from a structured methodology. The three main components of that methodology are identification, assessment and mitigation. The methodology outlined in this paper is based on the experience of risk managers across different financial institutions, supervisory agencies and non-financial institutions.
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Author's Biography
Dirk Broeders is a senior strategy adviser at the Supervisory Policy Division of De Nederlandsche Bank and a finance professor at the School of Business and Economics of Maastricht University. He is a former executive member of the International Organisation of Pension Supervisors (IOPS) and fellow at the Financial Stability Institute of the Bank for International Settlements.
Herwin Loman is a senior strategy adviser at the Supervisory Policy Division of De Nederlandsche Bank. Before joining DNB he was senior economist at Rabobank Economic Research and economic policy adviser at the Dutch Ministry of Foreign Affairs.
Joris Van Toor is a policy adviser at the Supervisory Policy Division of De Nederlandsche Bank. He studied econometrics and operations research and quantitative finance and actuarial sciences at Tilburg University. From 2014 to 2017, he did PhD research at the TIAS School for Business and Society on the performance of banks.
Citation
Broeders, Dirk, Loman, Herwin and Toor, Joris Van (2018, December 1). A methodology for actively managing tail risks and uncertainties. In the Journal of Risk Management in Financial Institutions, Volume 12, Issue 1. https://doi.org/10.69554/PPYP7914.
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