Closing Thoughts on Financial Risk Management by Skoglund and Chen
Book: Financial Risk Management: Applications in Market, Credit, Asset and Liability Management and Firmwide Risk Authors: Jimmy Skoglund & Wei Chen ISBN: 978-1-119-13551-7
I have been working through Jimmy Skoglund and Wei Chen’s Financial Risk Management chapter by chapter. This is the closing post. Here is what stuck after covering market risk, credit risk, counterparty risk, liquidity, funds transfer pricing, firmwide aggregation, and stress testing.
What this book is
It is a practitioner’s textbook for bank risk management. Not a light read. Heavy on models, worked examples, and Basel regulation. But the authors consistently connect formulas to decisions: pricing, limits, capital, liquidity buffers, and profitability.
The ISBN is 978-1-119-13551-7. Skoglund and Chen write from real implementation experience, not just theory.
The arc of the book
Market risk (Chapters 2-3) builds from normal VaR through simulation, copulas, EVT, and LSMC. The message: normal models are a starting point. Tails matter. Computation matters.
Portfolio credit risk (Chapter 4) covers PD, LGD, EAD, credit VaR, credit derivatives, and Basel RWA. Credit is portfolio problem, not loan-by-loan.
Counterparty credit risk (Chapter 5) is the derivatives companion. CVA, wrong-way risk, collateral, netting, and CVA capital. Post-2008 this became a whole business line (the CVA desk).
Liquidity risk (Chapter 6) argues liquidity is consequential and path-dependent. Cash flow models, hedging buffers, structural planning, LCR/NSFR. The 2007 narrative runs through everything.
Funds transfer pricing (Chapter 7) connects risk measurement to business incentives. If you do not FTP liquidity and capital costs, you subsidize bad trades internally.
Firmwide aggregation (Chapter 8) and stress testing (Chapter 9) close the loop. Silo models are inputs. Regulators and boards want firmwide answers.
Five takeaways that survived
1. Risk management is not compliance theater.
Chapter 1 makes the case that risk management is competitive advantage, not just regulation. The 2007 crisis is the proof that box-checking fails.
2. Independence assumptions are everywhere and often wrong.
CVA assumes exposure and default are independent until wrong-way risk says otherwise. Liquidity assumes you can sell assets at haircuts until fire sales say otherwise. Aggregation assumes correlations are stable until crises prove they are not.
3. Cash is different from capital.
You can be well-capitalized and still die in a run. Liquidity buffers, LCR, and contingency funding plans are not optional extras.
4. Internal prices shape behavior.
FTP is how banks tell branches what business is worth. Skip liquidity or capital in FTP and you get Northern Rock-style maturity mismatch rewarded on internal scorecards.
5. Firmwide view is the finish line.
Top-down aggregation and bottom-up stress testing are complements. Neither alone is enough. CCAR and EBA exist because silo risk management missed the big picture.
What I liked
The worked examples are concrete. Swap CVA with numbers. Netting that cuts CVA by 8x. Mortgage RAROC with FTP breakdown. Table after table that you can sanity-check.
The book does not hide computational cost. CVA needs exposure simulation. Bermudan swaptions need nested sim or LSMC. Finite difference Greeks do not scale. Adjoint methods exist for a reason.
Regulation is integrated, not bolted on. Basel capital, CVA charge, LCR, NSFR, CCAR capital ratios: all connected back to the underlying risk models.
What was hard
This is not an entry-level book. You need comfort with probability, simulation, and fixed income math. The HTML source I worked from is dense with equations.
Some sections feel written for quants building production systems, not for generalists. That is a feature if you are the quant. A challenge if you want a 200-page overview.
Who should read it
- Risk managers building or validating market, credit, or CVA models
- ALM and treasury teams implementing FTP and liquidity frameworks
- Stress testing teams facing CCAR, EBA, or similar regimes
- Students with finance and math background who want buy-side/sell-side bank risk depth
If you only need conceptual fluency, read the blog series. If you are implementing any of these systems, read the book.
Final thought
Skoglund and Chen keep returning to one idea: measure risk in a way that connects to a decision. Limits, prices, buffers, capital ratios, RAROC hurdles. A number nobody acts on is waste.
The 2007 crisis is the recurring villain. Wrong-way risk, liquidity runs, CVA blowups, inadequate firmwide stress tests. The regulatory response (Basel III, LCR, NSFR, CVA capital, CCAR) is the hero arc, even if implementation is exhausting.
Risk management is a loop: identify, measure, monitor, control, decide, and identify again. This book is a detailed map of that loop for a modern bank.
Thanks for following the series.