Page 141 - Risk Management in current scenario

different stresses and there is a no com-mon methodology in framing
such scenarios at present.

In the current process of risk identification and risk assessment, macro
risk analysis is finding very little space. It has been seen in the past that
many of the micro risks starts developing from macro environment but
its signals are often ignored. Many financial disasters in the past happened
due to crystallization of micro risk but key trigger points were macro
events.

Though Baring Bank failed due to Nick Leeson's position into the
derivative market, however, it was 1995 earthquake in Japan that led to
fall in Nikkei index and index in other Asian market triggering
unanticipated losses to Baring Bank. Had that earthquake in Japan not
come, the Baring bank would have been in existence today- we do not
know?

Similarly, Long-Term Capital Management (LTCM) was a hedge fund
management firm based in Greenwich, Connecticut that used absolute-
return trading strategies combined with high financial leverage suffered
losses due to failure of Russian Government to honour the payment
which was a macro risk event.

Both the examples suggest that macro risks assessment is important and
should find place in the future risk management framework. Understanding
such macro risk may also help in reducing the capital requirement of the
company.

Future focus on Risk Management

Many tail risks results from macro events such as social, economic,
political, natural calamities, terrorist attack etc. but get un-noticed leading
to financial disaster. With increasing integration of global economy, the
correlation between different macro risks factors are increasing at a much
faster pace now than ever before.

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