Introduction
Introduction
Introduction
Quantitative Fundamentals
Economic Capital Foundations
Stress Testing Foundations
Market Risk
Credit Risk
Counterparty Credit Risk
Operational Risk
Liquidity Risk
Business Risk
Interest Rate Risk in the Banking Book
Balance-Sheet Projection
Conclusion
1.1 THE ANATOMY OF A CRISIS
The 2007–12 global financial crisis (GFC) posed significant challenges to financial services firms (including banks, insurers, asset managers and hedge funds) and regulators, as well as the wider global economy. A key lesson learned was that financial services firms were ill-equipped to deal with prolonged systemic crises.
Just prior to the GFC, the global economy was growing rapidly. Global markets were recovering from financial stress events brought about by the collapse of the “tiger” economies (in 1997), the default on Russian sovereign debt (in 1998), the dot-com bubble of 2000, the events of September 11, 2001 and the collapses at Enron and WorldCom (2001–2).
Despite this, equity market indexes worldwide were reaching record levels. In addition, the market for traded credit products also grew substantially between 2000 and 2005, with many innovative products being developed by investment banks to meet the needs of institutional investors. This followed a period of significant innovation in credit and financial derivative modelling techniques in the late 1990s.
One family of such products is securitisation products, of which key examples
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