Risk: Some New Dimensions

Abstract

As befits an industry built on risk assessment, the issue of risk is at the forefront of the concerns of the excellent banks. Whereas the focus of risk in Excellence in Banking was on strategies to manage risk in the traditional commercial banking loan products, it is now on two quite different challenges. Firstly, the advent in the early 1980s of the wholly new array of rate risk management products such as interest rate swaps has posed challenges of product understanding and control. Secondly, replacing prime loans lost to securitization with Leveraged Buyouts (LBO) and other so-called leveraged products raises not only issues of risk reward but also one of strategic choice for those not prepared to accept the risks of corporate lending as defined in the late 1980s.

We’ve relearned that the more exotic the product, the higher the risk you run if you don’t take the trouble to understand the risk. — Tom Jones, Citicorp.