Glossary

۱- What Are Financial Risks?

۲- Risk at the Individual Level

۳- Financial Risk Management at the Institutional Level

۴- Understanding and Managing Global Financial Risk

۵- Geographies of Financial Risks: Going Ahead

Further Reading

Glossary

Behavioral biases Cognitive distortions that cause people to put disproportionate weight in favor of or against one issue or person. With regard to risk, behavioral biases lead to misperceptions of risk and potentially dangerous decisions. Financializaton The term describes the historic trend of the disproportionate growth of the importance of the financial sector relative to the real economy. It is characterized by rising share of the financial sector in gross domestic product, increasing usage of financial products and a growing complexity of financial instruments. Formalization of risk management Process of the increased reliance of risk managers on mathematical tools and compliance rules while neglecting traditional heuristic methods. Though limiting their own discretionary scope, they justify their actions and decisions by resorting to “objective” numbers, models, and regulations. Individualization of risk Individuals increasingly bear the burden of risk and are compelled to make their own financial provisions against a whole host of risks (including unemployment, sickness, and retirement). At the same time, individuals struggle to master risky situations due to the growing complexity of modern finance. Radical uncertainty The decision-making situation characterized by the lack of any quantifiable knowledge about some future occurrences. The notion of radical uncertainty is in stark contrast to the term “risk,” which assumes that not only possible future outcomes but also their probabilities are known in the present. Risk attitude The willingness of someone to take risks. Sociodemographic factors play a large role explaining differences in risk attitudes. Risk culture System of attitudes and behaviors present in an organization that shapes risk decisions made by management and employees. Risk perception The way a person subjectively estimates and “feels” about risk. It can be heavily distorted by behavioral biases. Systemic risks Possible disturbances of a financial system that may lead to its entire breakdown. They are endogenous, that is, result from the interconnectivity of financial actors and institutions and are amplified by feedback mechanism among them. Varieties of capitalism Framework for analyzing the institutional similarities and differences among the developed economies.

What Are Financial Risks?

“Financial risks” is a collective term for a variety of different types of risk and uncertainties that are related to the use of financial services. There are five basic types of these services that are associated with financial risks:

• Financial intermediation between savers and investors as well as companies and consumers ensure the efficient allocation of monetary resources, the necessary funding of households, governments, and businesses and provision of liquidity. Financial intermediation transforms certain assets or liabilities into different forms of assets or liabilities regarding their risk, maturity, and size, for example, a bank transforms many small money market accounts into one sizable long-term property loan. Various forms of intermediation make the financial system more intertwined so that a collapse of individual financial intermediaries could lead to systemic failure and cause high costs for individuals, firms, and society