A Risk Professional’s Survival Guide

World events and new financial products have shown the importance of risk management to the finance industry. The numerous mathematical models customarily invoked in addressing risk management can make it difficult for students of the subject to learn to put into practice the tools of the trade. In many traditional texts on risk management and finance, theory and application are taught separately. The theory is usually presented first, and then the concepts are reinforced by examining a case involving a real or fictional firm, either in the main body of a chapter or as an end-of-chapter homework assignment. In most instances, different firms are used throughout the book to illustrate the various concepts.

Clifford Rossi, executive-in-residence and professor of the practice at the University of Maryland’s Robert H. Smith School of Business, takes a different approach in A Risk Professional’s Survival Guide: Applied Best Practices in Risk Management. To integrate the theory and practice of risk management, Rossi applies the key concepts to a single fictional institution that represents “systemically important financial institutions,” conveniently named SifiBank. In lieu of the traditional approach of introducing the theory and then applying it in a case, Rossi introduces the issues through SifiBank and provides the theoretical tools that the bank will need to establish an appropriate risk management policy. Using the same financial institution throughout the book enables the reader to gain insights into its unique circumstances and provides continuity that makes the process of understanding the concepts more intuitive.

Rossi has structured SifiBank as a bank holding company that includes Sifi Bank, Sifi Thrift, Sifi Financial, and Sifi Investment Bank. This device allows him to discuss the risks faced by different types of financial institutions as well as the issues that arise for a large financial institution with a number of divisions.

The author points out what makes risk management a unique field: “Risk management is less a formal discipline, such as accounting or finance, and more an amalgamation of several disciplines.” In many ways, this definition parallels the diverse duties of the financial planner, whose job is to coordinate a number of experts, including accountants, lawyers, insurance agents, and portfolio managers. Similarly, the successful risk manager needs to have an intimate knowledge of the firm’s business, financial, and accounting activities, as well as the expertise to analyze significant amounts of data from these diverse areas.

Rossi is quick to note that a key objective of risk management is to provide a framework for taking prudent risks, rather than simply eliminating or mitigating risks. Because market conditions can change rapidly over time, the framework must be revised to allow for responses to new developments. By focusing on SifiBank, Rossi is able to illustrate how financial institutions can respond to evolving situations.

A Risk Professional’s Survival Guide takes the reader through the many factors to be considered in devising a sound risk management policy. Before covering the various tools and topics of risk management, Rossi states that a sound risk management policy begins with the structure of the firm and its approach to risk governance. Rather than pay lip service to the topic, Rossi devotes an entire chapter to the issue of corporate governance. Although corporate governance might appear to be a topic that consists more of discussion than of theory, Rossi provides a theoretical framework for it, using expected utility theory as well as behavioral concepts.

The author offers more than a theoretical basis, taking the reader through concrete issues of risk management. Chapters address specific risks that would be faced by a large financial institution such as SifiBank, including credit, interest rate, market, and liquidity risks. The book includes numerous charts and tables to illustrate the concepts. To add to the realism of the cases, Rossi blends the use of actual companies, such as JPMorgan Chase and Citi, with his fictional institution by having SifiBank hedge the risks of JPMorgan Chase and Citi stock.

In the final chapter, Rossi ties together the various strands of risk management by discussing how firms can take an integrated approach. For a large financial institution like SifiBank, creating regular lines of communication between the various business groups and the corporate risk office is critical. By structuring SifiBank as a bank holding company, the author is able to show how decisions made by one division affect other divisions and the firm as a whole. Decisions made by one line of business influence not only firm-wide costs but also the manner in which the bank manages and reports its risks. Rossi points out that pursuing an integrated approach also improves the accuracy of risk outcomes.

Clifford Rossi’s unique approach to the subject makes A Risk Professional’s Survival Guide a highly readable and informative book that can serve the needs of a variety of individuals. The inclusion of end-of-chapter problems gives the book the structure necessary for use in a classroom setting, but readers interested in gaining a general overview of risk management will find the book valuable even if they choose to focus on the basic concepts and place only limited emphasis on the more rigorous discussions. Those who plan to become practicing risk managers can gain additional insights by focusing on the equations and testing their knowledge with the end-of-chapter problems. On the whole, A Risk Professional’s Survival Guide is an excellent read for anyone wishing to explore the issues of risk management.

—R.L.M.