Strategic Exposure Group
Our Pioneering Exposure Management Experience
Prior to 1980, there didn’t exist a measure of interest-rate exposure. Even though managers were aware of interest rate risk, no one could describe quantitatively how much of the corporate income was at risk due to the interest-rate structure of their balance sheet. Because interest-rate exposure was not quantified, there was no effective corporate interest-rate exposure management process.
In 1980, our founder Karamjeet Paul developed and implemented a framework to define and quantify interest-rate exposure for Citicorp, a global financial institution, thus creating the concept of interest-rate gap and gap management. Using this framework, an interest-rate exposure management process was implemented – that included establishing corporate goals, limits and strategies – reducing the institution’s global interest-rate exposure from an unacceptably high level to the corporate target in 18 months.
Our founder was there at the creation of the gap-management framework and, over the years, has seen the interest-rate risk and exposure management framework evolve from its infancy to its current global sophistication. Today, interest-rate exposure or gap quantification is the foundation of interest-rate exposure management at all businesses, and over the years has led to the development of a global, multi-trillion dollar exposure trading market. Also, the use of a framework to define and quantify the exposure enables the functioning of an effective interest-rate exposure management process at most companies today.
We believe that senior financial managers today face the same challenges in relation to exposure from other extreme financial and operational (BI risk) risks as what financial institutions experienced in relation to interest-rate exposure in 1980. At most companies today, there is an urgent need for an objective quantitative measure of exposure from extreme tail risk, such as probable maximum loss (PML), to establish meaningful corporate exposure limits or operating guidelines that constitute an effective corporate exposure management process.
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