Correlation Risk Overwhelms the Global Banking Industry
Banks don’t need to wait until the Basel Committee tells them what they should do in terms of risk control decisions, tests and procedures. That would be a poor policy because, typically, what is included in new rules and directives is the common denominator. Well-governed institutions would want to do much more to be ahead of the curve. A policy which can pay dividends is to pay attention to correlation coefficients, and use them for both experimentation on latent or hidden exposures and for effective risk management.
KeywordsRisk Management Credit Risk Credit Default Swap Basel Committee Collateralized Debt Obligation
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