Risk versus vulnerability

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Accidents will happen. Four strategies for coping: three focus on the accident, one focuses on your organisation.

Accidents

• Dealing with accidents:

• Respond to accidents when they happen
• Limit damage accidents can cause
• Minimise chance that accidents happen

Reaction	Damage Limitation	Avoidance/Prevention
Closeout Event of default Breach of contract	Trade monitoring Monitor for red flags Regular due diligence	Have good data and know your client Relationship management Credit lines
Chaos Fog of war Panic Urgency Volatility Fear Lack of information: if you are at reaction point, chances are your information was already bad and will now be worse. Compounding effect of above effects in combination.	Holistic views: where are the exposures concentrated? Where is market risk concentrated?Where are are margin multipliers thinnest? Are there any concentrations of red flags? Share data across credit, fnancial crime compliance, trading	Calm Orderly Timely Systematic Thorough Inquisitive: the object is not to satisfy yourself that there is no risk but to to identify where is the risk

Vulnerability

• Dealing with your organisational model: Assuming accidents will happen, reduce vulnerability to them. Vulnerability comes in the form of unusual concentrations:

• Concentration of energy — in a financial services firm, call this financial risk, or profit-and-loss generators

A:*Concentration of population — different modelsof distributed network. Compare “hub and spoke” models like airports (fragile — take out a hub and large parts of the system are inoperable) with “multiple-node” networks like the internet (robust — take out a node and everything can flow a different way).

• Concentration of political/economic power— increases the vulnerability to harm from executive failure.