Understanding Systemic Risk in Global Financial Markets. Gottesman Aron

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      Aron Gottesman

      Understanding Systemic Risk in Global Financial Markets

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      Understanding Systemic Risk in Global Financial Markets

      ARON GOTTESMAN

      MICHAEL LEIBROCK

      Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

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       Library of Congress Cataloging-in-Publication Data:

      Names: Gottesman, Aron, 1970–author. | Leibrock, Michael, 1966–author.

      Title: Understanding systemic risk in global financial markets: a professional guide to accounting arbitrations / Aron Gottesman and Michael Leibrock.

      Description: Hoboken, New Jersey: Wiley, [2017] | Series: Wiley finance series; 1935 | Includes bibliographical references and index. | Identifiers: LCCN 2017010796 (print) | LCCN 2017023709 (ebook) | ISBN 9781119348542 (pdf) | ISBN 9781119348467 (epub) | ISBN 9781119348504 (cloth: alk. paper) | ISBN 9781119348542 (ePDF)

      Subjects: LCSH: Financial risk management. | Financial crises. | Risk. | Financial institutions.

      Classification: LCC HD61 (ebook) | LCC HD61 .G67 2017 (print) | DDC 332/.0415 – dc23

      LC record available at https://lccn.loc.gov/2017010796

      Cover Design: Wiley

      Cover Images: (top) © jijomathaidesigners/Shutterstock; © arosoft/Shutterstock; (bottom) © NPFire/Shutterstock

MLTo my wife, Roseann, and my children, Jaclyn, Victoria, and MichaelAGIn memory of my mother, Susan Rachel Raizel Gottesman z'l

      Preface

      This book provides an in-depth introduction to systemic risk. Systemic risk is the risk that developments in the financial system will disrupt financial stability and the economy. We've written this book because the topic of systemic risk is arguably the most critical issue facing the financial services industry today and one whose impact can spill over into the broader economy with devastating effect on individual consumers and investors.

      The Credit Crisis of 2007–2009 was an important catalyst for this book. Yet financial crises have been occurring for centuries, often driven by very similar factors to the Credit Crisis of 2007–2009. One of our objectives is to help you develop a deep understanding of systemic risk through meaningful exploration of the lengthy history of crises and the commonalities across the crises.

      We also feel there is a need for systemic risk to be viewed by practitioners as a distinct risk discipline, one that can be analyzed and monitored in an organized and repeatable fashion, much like longstanding risks such as market risk, credit risk, and operational risk have been for decades. Hence, another of our objectives is to provide you the contours of the discipline of systemic risk.

      This book can be used either as an introductory text or as an accompaniment to a quantitative treatment of risk. We do not assume that the reader has sophisticated understanding of finance or math, nor have we assumed that he or she has hours to decipher our arguments. Instead, this book provides straightforward, plain-talking explanations that are directly related to those issues that matter most to practitioners. Audiences for this book include:

      ● Individuals and university students learning about risk management for the first time who do not have extensive math or finance backgrounds.

      ● Practitioners in “middle-office” and “back-office” roles in financial institutions, such as those in risk management, operations, technology, information security and compliance that require a broad understanding of the types of risks posed by systemically important financial institutions and who have a need to identify such risks to do their jobs.

      ● Practitioners, regulators, and academics who want to understand how regulation and clearinghouses function as risk-mitigating utilities for the financial industry.

      This book consists of 16 chapters and an appendix. Here is a brief summary of the material that is covered in each chapter.

      The first three chapters of this book introduce the concept of systemic risk and explore its history. Chapter 1 provides a high-level introduction to the topic of systemic risk, including definitions provided by industry, academic, and regulatory experts, and explains the importance of enhancing understanding of systemic risk. Chapter 2 provides a summary of prior systemic events and identifies common drivers of these events based on several hundred years of evidence. Chapter 3 provides an overview of the events surrounding the Credit Crisis of 2007–2009, which had a devastating impact on the both the financial industry and economies of the United States and Europe.

      Chapters