About
Extinction-Level Risk
ELRs are not generally merely extreme versions of regularly-managed risks. The events which have, historically, brought down financial companies have tended to be multi-dimensional, a mixture of market, control, liquidity, operational risks, etc. Hence their management and mitigation need to be different.
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Most risk management is, in practice, P&L management. The intent is to limit the P&L impact of adverse events. It is commonly assumed that this will inherently manage the risk of a company’s failing or a portfolio experiencing an unacceptable loss.
However, the metrics and techniques used for general risk management are not necessarily effective in managing or mitigating ELR.
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It is also the case that some mitigation of ELR can be done at little or no internal cost.
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ELR-type analysis can also be used to mitigate extreme but not extinction-level risks in portfolios and businesses, where those risks are also not captured by standard risk metrics and methods.
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