| Has Risk Management as a discipline been | | | | there is a link between a firm's culture and it's |
| devalued by the events of the financial crisis? | | | | success. Firms that have a culture that embraces |
| With the fall Merrill Lynch, Bear Stearns, HBOS | | | | and understands risk perform well; staff are |
| and Northern Rock the ability of firms to use risk | | | | familiar and comfortable with risk, well trained and |
| management as a predictive tool has been | | | | empowered to make decisions quickly, but most |
| discredited. Can this credibility be rebuilt? | | | | importantly, they understand that as individuals |
| Not just for emergencies. | | | | they must not put the firm's finances and |
| Over the last decade all kinds of tools and | | | | reputation at risk. Equally, this means control |
| techniques for risk management emerged. They | | | | functions need to have the delegated authority |
| enabled financial firms to grow at rates far | | | | from the Board (and confidence) to push back on |
| exceeding those of others sectors. Also, it is | | | | front office decisions where they deem it |
| these tools that could arguably be the cause of | | | | appropriate. |
| the financial crisis we are seeing. In the past year, | | | | Data consolidation for reporting purposes is |
| major financial institutions have written off in | | | | essential |
| excess of $400bn and governments have | | | | Risk management and control functions need to |
| amassed record levels of debt from supporting | | | | be adequately funded and resourced to ensure |
| the survivors and pumping liquidity into the | | | | they keep pace with the rapid innovation in |
| market. Are we right not to trust risk | | | | financial instruments. Recently history degree and |
| management anymore? | | | | speed of change has resulted in a struggle for |
| It is not the first time we have seen risk failures | | | | Risk function to maintain appropriate oversight. |
| This financial crisis is not the first time risk | | | | Record profits also got in the way of making |
| management has come under fire. Black Monday | | | | informed decisions on the appropriate amount of |
| in 1987, LTCM in 1998, the dot com bubble | | | | risk that an organisation should be running on a |
| bursting in 2001 and the collapse of Enron are all | | | | daily basis. That's not to say risk reporting didn't |
| examples of serious risk management failures. | | | | occur and Risk Committees were ignored, but the |
| Trading strategies and risk management tools | | | | quality of data, an organisation's reporting |
| have since become increasingly sophisticated and | | | | hierarchy and its ability to consolidate risk |
| reliance and trust increased. Why? Because we | | | | reporting at a meaningful level may not have. In |
| either embrace it and learn from our mistakes, or | | | | particular firms now need to focus on |
| ignore it and bury our head in the sand. In general | | | | understanding potential losses due to macro |
| terms, it is the firms that have embraced and | | | | economic factors and not to underestimate tail |
| understood risk management, including its | | | | risks. Investing in data and management reporting |
| limitations, which have enhanced their competitive | | | | tools will lead to an increase in confidence |
| positions. | | | | improved decision making. |
| Understand the limitations of risk management | | | | Can credibility in risk management be rebuilt? It |
| Today we are helping clients understand the | | | | may take some time, but in short it has to be |
| strengths and also the limitations of risk | | | | rebuilt. We are surrounded by risk every day, in |
| management. Through balancing the need to | | | | everything we do. It would be a grave mistake |
| generate shareholder value against creating the | | | | for financial institutions to conclude that trying to |
| appropriate risk profile and implementing the | | | | effectively manage risk was too difficult or |
| relevant management controls, we are helping | | | | dangerous. We do not pretending that the road is |
| them to rebuild trust. We are also implementing | | | | going to be easy, but confidence will be re-instilled. |
| governance structures and procedures, and | | | | We need to have a reality check and take stock |
| delivering the capability to manage and understand | | | | of the true limitations which exist in risk |
| huge volumes of data and embed a risk | | | | management. and ensure that risk governance is |
| management culture within the organisation. We | | | | robust and transparent. Most importantly, risk |
| will never be able to remove risk - we can, | | | | managers need to have confidence instilled in |
| however, understand how destructive it can be | | | | them that they can trust the data and |
| and put in place the appropriate mechanisms to | | | | information which they use to make decisions. |
| ensure that an organisation doesn't. | | | | Distinct helps clients to integrate risk management |
| Culture is key | | | | at a strategic level in order to help meet |
| Financial institutions first and foremost must | | | | regulatory demands, aid decision making and |
| re-examine their corporate culture. It is clear that | | | | generate sustainable growth. |