One thing that the financial meltdown has made clear is that the relief of many contributing factors, it is clear that risk management does not adequately manage the risk. Why this is so will be the subject of much debate in the coming months and years. Risk managers are constrained by the executive suite that does not listen to the warnings, risk managers or not responding or not even able to answer the basic questions of their trade? Whatever the reason for the profession of Risk Management has some serious introspection to do.
Now, suddenly, the economies of many countries, not to mention the banking industry, is in tatters, we have dozens of articles and blogs all lamenting the state of risk management and what we have to do to get everything back to the right that if there are any elixir, or a magic wand that will make everything right.
All these articles and blogs are tapping away on the same old drum, all are documenting how each has done wrong in the management of risk, and all joints are extolling bank, senior management, regulators and ratings agencies to do better next time.
Where were all these writers and bloggers in the good times? Where were the intoxicating days before the summer of 2007 when banks and other financial industry operates happily if the only way forward is "up" when the "old" economy had been declared dead as a dodo The mantra of the "new economy" was "the benefits", "premiums" and "innovation." Like the "old economy", "risk" in all its forms had, by the invocation of all new hedging strategies and derivatives was also pronounced dead.
Certainly there are some (very few), it sounded warnings that this was going to end – but who wants a Jonah in the midst of them when there is an endless beach party to go?
As a professional risk management and professional coach, I feel offended with all the soul searching and hand wringing going on at this time. Please tell me where all these new converts have been risk-averse? Where were they when they were really needed?
Now that the party is finally the time has come to make things right. Risk management in the first decade of the 21st century failed miserably. The tone at the top was rotten, either in banks or regulatory agencies or evaluators of risk to themselves. And the rot permeated all the way to the bottom of the stack.
What were the failures?
Failure to measure risk – the risk models is unwarranted, especially misspecified and misunderstood.
The failure in training – the boards and bank regulators were not sufficiently instructed in "risk" actually means. Bank staff were trained only in the three P – product, performance and economic benefit. Issues such as risk concentration, planning scenarios, malfunctions are just concepts that made a sound intelligent. Worst of all – the risk management costs money and, of course, unjustified costs "are the bane of every diligent (but not conservative) banker.
The failure to mitigate risk – without understanding the risks they really can not be measured and no measure can be mitigated. These factors are interrelated. The one leads to another.
No more hand wringing! We all know that the fault lies. What is needed now is some courageous risk managers who roll our sleeves and do the job – this time correctly.
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