A methodology for actively managing tail risks and uncertainties

Dirk Broeders, Herwin Loman and Joris Van Toor

Journal of Risk Management in Financial Institutions, 2018, vol. 12, issue 1, 44-56

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.

Keywords: tail risks; uncertainties; behavioural biases; power laws; regulation (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2018:v:12:i:1:p:44-56

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