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It is a truism that while every financial crisis is different, errors made in risk management in banking are timeless. I remember well reading an article from 1994, published by the Federal Reserve Bank of Minneapolis, that highlighted mistakes made by both large and small banks in the US banking crisis of 1980–81. Every single one of the recommendations made by the authors of that paper would have been relevant and applicable to banks that crashed in 2008–09. An ineffective risk management framework, coupled with an aggressive asset origination policy, will always combine to bring badly-run banks down the next time there is an economic downturn. Sound principles of risk management are vital at all times, throughout the cycle. In essence, they are timeless.

This book is timeless. I have been familiar with it since it was first published, and have been its biggest fan ever since. It is great to see it being issued now in its 4th edition. It is one of those rare books that combines the rigor of a sound, balanced academic approach, essential if one is to operate in finance without emotion and with logic, with the accessibility and real-world relevance that is an imperative for the practitioner. It is a genuine “handbook”, one can read it and apply its principles right away in just about every type of banking institution in the world, and that bank would be better off as a result.

Every single chapter in the book is worthy of study. I am very enthusiastic about the chapters on ALM gap and hedging. The author places everything in context, and ties in market risk and banking book risk, together with credit risk – a rare, combined approach that plays to my own strong belief about how risk management in banks should be governed by the Asset-Liability Committee (ALCO). Balance sheet risk needs one oversight body that operates with board authority, and as the balance sheet is impacted by ALM, market and credit risk together, it makes sense to view these from the ALCO table.

As a young man I used to play the bass guitar. Being asked to write this Foreword is a bit like being asked by Paul McCartney to play bass on his next album, it is that much of a privilege! Professor Bessis has made a fantastic and most worthwhile contribution to the financial economics literature with this book, right from its first edition, and I am lucky to have had a copy on the desk with me ever since it was first published. I do hope that this exciting and interesting new edition makes balance sheet risk in banking something that is more mainstream at the board level, and furthermore spurs readers on to their own research and investigation – if they follow the application and dedication evident in this work, they will not be going far wrong.

Professor Moorad Choudhry

Department of Mathematical Sciences

Brunel University

Former Treasurer, Corporate Banking Division, Royal Bank of Scotland

November 2014