FINM 39100

Model Risk, Counterparty Risk, and Systemic Risk from a Regulatory and Risk Management 

Spring Quarter
Instructor: Alex Dill

The course introduces students to the key risks in the banking and capital markets sectors and the associated regulatory, risk management, and compliance requirements for financial institutions with a focus on the requirements of the Dodd–Frank Act (DFA). Over the last ten years, the financial crisis of 2007-9 and DFA have transformed the risk management and compliance professions, requiring sophisticated quantitative modeling to calculate regulatory capital and to otherwise meet regulators’ expectations. Model risk and model risk management (MRM) now extends into all areas of the financial markets. In a course-long homework, students apply the core principles of MRM following Federal Reserve stress testing requirements based on a sample bank portfolio. Students also learn the primary components of a financial institution’s corporate governance system, internal controls, and management of conflicts of interest, and gain an understanding of a risk management system optimally designed to achieve a firm’s business objectives as well as compliance with the DFA. Case studies illustrate both risk management breakdowns and best practices, including the “quant quake” of August 2007 in which highly leveraged quantitative-trading hedge funds incurred significant losses.

This is a five-week course taught in the first half of the quarter.