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Operational Risk Management of xx company - Essay Example

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Operational Risk Management of xx company

But due to the worldwide credit crunch of 2007-08, the Lehman Brothers has resulted in a tremendous downfall. On September15, 2008, it filed for Chapter 11 bankruptcy, condemned to become the biggest bankruptcy filing in U.S. history and caused a downfall of the world’s financial system (Lounsbury and Hirsch, 2010, p.71). The federal government decided to not bail the company. The firm’s share fall more than 90% and shook financial stocks. The bankruptcy was mainly due to the sub-prime mortgage crisis. However, there were other factors also that were responsible for the failure of the company such as: the overall culture of the company, the tools they utilized and the risk management department. Lehman Brothers overleveraged themselves while not preserving the minimum capital required, depending on risk tools in isolation (Alman, Cudmore, and McVeigh, 2013, p.1). The company has obtained huge amounts of subprime mortgage debt and also the lower rated assets. In 2007, despite the fact that the Lehman Brothers had closed its subprime mortgage division, it had uphold much of its subprime mortgage liability, therefore resulting in huge losses from the collapse of the subprime market. Its bankruptcy caused the investors to lose millions (Ferrell, Fraedrich and Ferrell, 2011, p.403). Lehman Brothers are exposed to various types of risk such as market and credit risk, counterparty risk, liquidity risk, country risk, operational risk and foreign exchange risk. This report will focus how they are exposed to these various types of risks, what are the threats of these risks and how they will manage these risks. Identification of Risk and Analysis of Threats Risk is the change or probability of a deviation from an anticipated outcome. In order for risk to be present there should be exposure and uncertainty. Risk is measured with the use of risk measurement framework and process (Hays and et al, 2005, p.3). It arises due to various causes such as macroeconomic or external shocks, for example foreign exchange crisis or liberalization-induced credit booms (Bank and Fund, 2005, p.213). Market, Counterparty and Credit Risk The Lehman Brothers was exposed to market counterparty and credit risk through the sudden collapse of its total return swap counterparty. The firm’s share also fall more than ninety percent due to market risk and shook financial stocks. It has been exposed to credit risk which has arisen from derivatives transactions and it has been revealed with the bankruptcy of this firm and has resulted in the credit default swap market. Loss due to credit risk has resulted in decline in the creditworthiness of borrower. During bankruptcy, the total notional value of credit default swap (CDS) trades indicating Lehman Brothers was around USD 72 billion. This has caused bilateral payments of USD 21 million among buyers and sellers of credit default swaps that allusion Lehman Brothers based on auction determined payments. Due to the firm’s bankruptcy, this was the credit loss for the sellers of the CDSs. For the buyers, this amount signifies their ...Show more

Summary

Risk Management Table of Contents Introduction 4 Identification of Risk and Analysis of Threats 5 Market, Counterparty and Credit Risk 5 Foreign Exchange Risk 6 Country Risk 6 Liquidity Risk 6 Operational Risk 7 Risk Management Framework 7 COSO Framework 8 COCO Framework 9 Risk Severity Matrix 10 Risk Management Methods of Lehman Brothers 11 Managing Market and Credit Risk 11 Managing Counterparty Risk 11 Efficient Collateral Management 11 Liquidity and Risk Modelling 12 Asset Verification 12 Sarbanes-Oxley Act of 2002 12 Restoring Faith in the Corporate Reporting Supply Chain 13 Impact of the Act on Lehman Brothers 13 Combined Code 14 Conclusion 15 Appendices 16 Reference 19 Introduction Leh…
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Operational Risk Management of xx company essay example
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