By Michael Leibrock, Managing Director of Credit Risk at the Options Clearing Corporation and Part-Time Lecturer in the M.S. in Enterprise Risk Management Program, School of Professional Studies
During my career as a risk manager at several financial institutions, I’ve had the opportunity to be part of or lead risk management teams through a number of systemic risk events, including the 1998 collapse of the hedge fund Long-Term Capital Management, the 2008 Global Financial Crisis and the Covid-19 pandemic, to name a few. Being on the front lines of so many historic risk events has taught me many lessons about how to prepare for and quickly respond to unexpected shocks to the financial system, regardless of their origin.
These lessons proved useful once again when global financial markets reacted strongly to President Trump’s tariff announcements in early April of this year. The Dow Jones Industrial Average fell nearly 1,700 points—or 4%—in a single day, while the S&P 500 declined by 10.5% over a two-day period, the fifth largest two-day drop since 1950. The CBOE Volatility Index (VIX), which Wall Street uses as a measure of investor “fear,” also surged the most since the Covid pandemic period, signaling broad uncertainty around the tariffs’ potential economic effects.
The impact of rare and unexpected events, often referred to as “idiosyncratic” or “tail risk” events, can have drastic consequences for the financial profile of some firms, potentially leading to a credit default(s). It simply isn’t practical to incorporate such unexpected market shocks into traditional counterparty credit rating models or margin models. For these reasons, and because history has shown that infrequent and unexpected market dislocations will always occur and with random frequency, firms must have robust risk management frameworks in place to address these realities.
For example, from a credit risk management standpoint it is critical to ensure that all of your firm’s borrowers or trading counterparties have sufficient capital and readily available liquidity to act as “shock absorbers” against the impact of significant, unexpected market events, similar to what occurred in April. Additionally, by having a rigorous stress testing framework in place, financial institutions can better estimate the extent of potential losses they might incur under a wide range of hypothetical “extreme but plausible” scenarios and estimated market shocks.
Lastly, as taught in Columbia’s Value-Based ERM course, there are specific techniques any firm can employ to quantify how various financial or operational risk events might negatively impact overall company value. Utilizing detailed surveys and moderated interviews conducted with a wide array of subject matter experts, a range of potential outcomes can be modeled such that executive management can make informed business and risk decisions about whether to make adjustments to business strategy to avoid or minimize exposure to such events. Furthermore, if complete avoidance of certain risks is simply not practical given a particular firm’s core business strategy, the Value-Based ERM framework can still provide valuable transparency to executive management and boards of directors about the risk they are taking and provide opportunities for partial risk mitigation or formal risk acceptance.
History has demonstrated that unexpected events will continue to materialize from time to time, given the inherent complexity and interconnectedness of global financial markets and geopolitical differences. In my 2017 book, Understanding Systemic Risk in Global Financial Markets, I trace the centuries long history of systemic risk events and also recognize that the future will surely bring new and unanticipated events by titling my final chapter, "Looking Ahead: Preparing for the Next Crisis." However, regardless of the exact nature or origins of future crises, firms can at least partially mitigate the impact from such risks by documenting lessons learned from past crises and by employing advanced, highly structured risk management planning.
Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of Columbia School of Professional Studies or Columbia University.
About the Program
The Master of Science in Enterprise Risk Management (ERM) program at Columbia University prepares graduates to inform better risk-reward decisions by providing a complete, robust, and integrated picture of both upside and downside volatility across an entire enterprise. For both the full-time and part-time options, students may take all their courses on Columbia’s New York City campus or choose the synchronous online class experience.
The spring 2026 application deadline for the M.S. in Enterprise Risk Management program is November 1. Learn more about the program here.
