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.
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.
It is also the case that some mitigation of ELR can be done at little or no internal cost.
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.