ABSTRACT
In this chapter, the analysis of the contemporary risk management approach from the standpoint of its effectiveness against tail risk is provided. The analysis reveals substantial limitations of current methods, tools and models used in risk management practice. This includes both judgemental risk models, Baseltype models and sophisticated internal models like economic capital models and early warning tools. Basel III enhancements are also analysed here and its limited anti-tail risk efficiency and unintended consequences are described. While the modern risk tools, models and methods can be very effective in the measurement and mitigation of normal day-to-day risk, they typically are misleading and unhelpful when applied to the area of the tail. The chapter provides insight into why it happens and why this risk ‘rocket science’ is inappropriate for extreme risk areas.
