Risk Management in a Post-Financial Crisis World
One thing that the financial meltdown has show in crystal clear relief is that among the many contributing factors, there can be no doubt that Risk Management didn’t adequately manage risk. Why this was so is going to be the subject of much debate in the coming months and years. Were Risk Managers constrained by the executive suite who wouldn’t hear the warnings, or were Risk Managers not answering or not even able to answer the basic questions of their trade? Whatever the reason the profession of Risk Management has some deep soul-searching to do.
Now, all of a sudden, that the economies of many countries, not to mention the banking industry, is in tatters, we have dozens of articles and blogs all bemoaning the state of risk management and what we need to do to get everything right again; as if there is some elixir, or some magic wand that will put it all right.
All these blogs and articles are pounding away on the same old drum; all are documenting how badly everyone has done in managing risk and all are extolling bank boards, senior management, regulators and rating agencies to do better next time.
Where were all these authors and bloggers in the good times? Where were they in the heady days prior to the summer of 2007 when the banks and the rest of the financial industry was gaily acting if the only way forward was “up”; when the “old” economy had been declared dead as a dodo and the mantra of the “new economy” was “profits”, “bonuses” and “innovation”. Like the “old economy”, “risk” in all its forms had, by the invocation of all the new hedging and derivative strategies been declared dead too.
True there were some (all too few) who sounded dire warnings of where this was going to end – but who wants a Jonah in their midst when there is a never-ending beach party on the go?
As a professional risk management practitioner and trainer I really feel aggrieved with all the soul searching and hand wringing going on at the moment. Tell me please where all these new risk averse converts have come from? Where were they when they were really needed?
Now that the party is finally over it is time to do things properly. Risk management in the first decade of the 21st century failed miserably. The tone at the top was rotten, whether in the banks or the regulatory agencies or the risk raters themselves. And this rot permeated all the way down to the bottom of the pile.
What were the failures?
The failure to measure risk – risk models were misused, misspecified and most of all misunderstood.
The failure in training – bank boards and regulators were not adequately instructed in what “risk” really meant. Bank staff was only trained in the three P’s – Product, Performance and Profit. Issues like risk concentration, scenario planning, operational failures were only concepts that made one sound intelligent. Worst of all – risk management costs money and of course “unjustified costs” are the bane of every diligent (but not prudent) banker.
The failure to mitigate risk – without understanding risk it cannot truly be measured and without measurement it cannot be mitigated. These factors are interconnected. The one leads to the other.
Enough of this hand wringing! We all know where the blame lies. What is needed now is some courageous risk managers who will roll up their sleeves and get the job done – properly this time.
Questions and Answers
Article Tags:
risk management
,risk managers
,post financial crisis
,risk
,bank boards
,regulators
,rating agencies
This article is the essence of the book Titled: Inactivity Based Cost Management, with the sub-title: Measurement of Intangible: Governance, Ethical & Fiscal Responsibility and Accountability, by the Author. Devil's Advocate is logical, props an alternative action for the same view, exhorts the ambitious to go ahead & be greedy assessing the pitfalls. Angel's Advocate propounds:'Truth involves completely opposite values; then only, it can be Truth' resolving the paradox of Governance.
Notesnmore.com provides you free handwritten notes on fyjc, syjc, fybcom, sybcom, tybcom, mcom1, mcom2 for Mumbai university students for commerce field
Economic history First five decades Pakistan was a very poor and predominantly agricultural country when it gained independence in 1947 from Britain
The capital market converts a given stock of investible resources into a larger flow of goods and services and augments economic growth. Capital markets will change completely if they grow beyond the cities and stock exchange centers reach the Indian villages.
According to characteristics of abrasives industry, combined with abrasives of modern enterprises in the production processes in high-quality products, modern marketing strategies
The article consists of the tips for the bankers to have effective followup over the loans granted to their borrowers
Interview with the intending borrower plays a great role in providing a lot of information to the credit manager while he is in the process of extending finance to a new borrower. In this article certain tips are given as to how questions can be posed during the course of credit interview
India: Banking covers the industry overview in terms of inflation, repurchase agreements, new loans, policy banks and foreign banks. It also covers the market trends and outlook including reserve requirement ratio, Basel III, financial integrated circuit cards, non-performing loan and internationalisation of RMB, plus the operational highlights and SWOT analysis of the leading players: State Bank of India, Punjab National Bank, HDFC Bank and ICICI Bank.
Personal banking is the term which is actually devised on the lines of retail banking. The essence of such type of banking facility is that the products and services are custom designed to meet individual banking and subsidiary needs.
Fears about how the problems in the Eurozone will have an effect on the UK, and how being part of the eurozone can be beneficial to some countries and negative to others. The eurozone has a strong influence on natural economic principles and these influences spoil the natural economic balances. Consequently a country's financial problems can continue to spiral whilst other countries can manipulate these factors to their benefit.
Financial innovation is not always clearly understood. Neither are its implications. This latter fact is critical to bank supervisors and regulators because innovative actions are not always benign or made for the general good. There are many different types of innovation especially when we deal with the financial world. Many of these have been driven by the technological revolution that has been so evident over the past few decades.
The mobile phone has become ubiquitous. It is the one hi-tech device that has become the universal calling card for humankind. Yet despite the privilege and the benefits that this instrument bestows it has turned many folk into rude bores bereft of any manners in their slavish obedience to this twenty-first century icon.
To really fix the financial and banking system governments and regulators need to get to the core of the problems that led to the 2007-9 financial crisis. The evidence so far indicates that the current approach has failed and that throwing money at banks is not a part of the solution. Unless the authorities can get the “fix” right we are facing ongoing crisis as banks revert to their old ways with little regard for anyone but themselves.
The use of the mobile phone for the transfer of workers’ remittances and for small payments holds much promise, especially in Africa. However two problematic issues threaten the mobile revolution. These are the attitude of the banks to their prospective clients and the attitude of bank regulators to non-bank participants.
Banks are once again up to their old tricks. It seems as the events of 2007, 2008 and 2009 have been forgotten. Greed seems to have taken precedence once again prompting the question of bankers and their conscience.
Discuss this Article
