Financial-Risk-Management-in-a-Volatile-Global-Environment.-Asia-Risk，-p-35-39.pdf

Financial Risk Management in a Volatile Global Environment by Francis X. Diebold and Anthony M. Santomero Wharton Financial Institutions Center The Wharton School University of Pennsylvania October, 1999 1 INTRODUCTION The virtual collapse of several Asian markets has triggered a series of aftershocks in the global financial markets. From the alleged contagion that spread the crisis to Russia and South America to the de facto collapse of Long-Term Capital Management (LTCM), the repercussions of these events have led to endless debate. Even as participants in the global marketplace continue to seek answers to basic questions, such as the cause of the events and their implications, the public sector and industry lobbyists have offered remedies. In April 1999, the President’s Working Group on Financial Markets issued a report that recommended a series of measures designed to constrain leverage in the U.S. portion of the financial system. (See Box 1.) Precipitated by the collapse of LTCM, the working group saw their recommendations as a needed response to the situation leading up to capital market vulnerability, regional crises and the financial collapse of some institutions. The President’s report was followed by an industry report from the Counterparty Risk Management Group, a consortium of twelve internationally active commercial and investment banks, which was issued in June 1999. (See Box 2.) The new document recommends ways to strengthen the management of market, counterparty, credit and liquidity risk without regulation and government interference. To some, th