Chapter 1 - Sustainability Management is Critical

Abstract

Financial institutions have invested hundreds of millions of dollars in business continuity plans (BCPs) to mitigate the impact of extreme exposure from operational risk of a major business interruption. It is also a critical regulatory requirement. Yet, no similar emphasis or requirement exists for a much larger exposure from tail financial risk that can threaten a financial institution as a going concern. Often regulatory requirements of stress testing, living will provision, and liquidity adequacy are mistakenly assumed to address extreme tail risk adequately. Yet none addresses tail risk effectively. A financial institution should never be in a position where the exposure from extreme tail risk can adversely impact the sustainability of the institution as a going concern, and thus turn into a crisis of confidence. This is the purpose of effective sustainability management or tail-risk management.