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A methodology for actively managing tail risks and uncertainties

Author

Listed:
  • Broeders, Dirk

    (Senior Risk Manager in the Financial Markets Division, De Nederlandsche Bank, The Netherlands)

  • Loman, Herwin
  • Toor, Joris Van

Abstract

Tail risks and uncertainties have a significant negative impact on financial institutions and the financial system. Their probability of occurrence is low (tail risk) or cannot be determined (uncertainty). One may believe that tail risks and uncertainties are unavoidable; however, this is too simplistic a view. Financial institutions and supervisory agencies can in many cases actively manage the likelihood and impact of tail risks and uncertainties. This active approach benefits from a structured methodology. The three main components of that methodology are identification, assessment and mitigation. The methodology outlined in this paper is based on the experience of risk managers across different financial institutions, supervisory agencies and non-financial institutions.

Suggested Citation

  • Broeders, Dirk & Loman, Herwin & Toor, Joris Van, 2018. "A methodology for actively managing tail risks and uncertainties," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 12(1), pages 44-56, December.
    • Handle: RePEc:aza:rmfi00:y:2018:v:12:i:1:p:44-56
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    More about this item

    Keywords

    tail risks; uncertainties; behavioural biases; power laws; regulation;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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