spikegifted.net - Risk Management

Conclusion: Does it worth all the trouble?

I think I've demonstrated the importance of risk management in various facets of the financial services industry. The above is but a limited exposé of what keeps risk managers in employment by day and keep them awake at night. I think I've demonstrated that the culture of risk management is not just something practiced by risk professionals but should be a philosophy ingrained throughout the entire organization. Having risk functions in an institution is not going to limit its exposure to risks, but business managers have to understand the concern of risk management and align and practice their businesses accordingly. I think I've shown that the risk management is highly resource intensive. It takes a lot of financial resources to put in place sophisticated risk systems that can monitor exposures that require quantitative assessment. It requires large amount of expertise and human resources to achieve coverage on the qualitative side of risk management.

The logical question is: Does it worth all the trouble? Being a risk professional, my answer is, of course, a bias one - a big fat 'Yes'. However, you don't have to go back far to see find situations where financial institutions haven't pay enough attention to risk management and ended up being caught out when things go wrong and discover that they have made huge losses: (I'll start from the most recent)
US sub-prime mortgages, hedge funds and the credit crunch (2007),
Argentinean default (2002),
Allied Irish Bank (2002),
WorldCom (2002),
Enron (2001),
Turkish devaluation (2001),
bursting of the 'tech bubble' (2000-2002),
Russian default and devaluation (1998),
Sumitomo Corp (1998),
'Asian Crisis' - Thailand, Indonesia, Malaysia and South Korea (1997-1998),
Long-term Capital Management (1997),
Barings Brothers (1995),
Mexican default and devaluation (1994),
US Savings and Loans crisis (early 1990s)

There are many others that were less infamous and never made it to the front page of newspaper. There are lots that are just simmering under the surface, waiting for the wrong conditions to show up... No business manager want to be at the receiving end of losses. No doubt, many of the institution that were caught up in those crisis and difficulties have managed to survive, but at a huge cost - both in terms of capital and shareholders' value. However, there were organizations that came out as winners - those that have good risk management have pull out of certain markets in time, or limited their exposures by transferring them elsewhere.

Risk management is all about finding, assessing, monitoring and dealing with risk. It is all too easy to allow things to be 'swept under the carpet'. On the other hand, while the owing up to a problem will force an institution to doing drastic things to rectify it and possible loss of prestige, it can also focus the resources of the institution to deal with the problem. By ignoring the problem, the pain will be probably be long and drawn out (just ask any one who really know the Japanese banking sector). There is a great quote which I feel is highly appropriate: "A cat that is not let out of the bag soon turns into a skeleton in the cupboard.

In the end, it is a fine balance between risk and return. Those who hold the view that risk management is a drain on valuable resources should re-examine their attitude. However, risk managers have to behave in a pro-active manner and gain the trust of and understanding from business areas. In the end, we are all playing for the same team.

Back to First Page
Back to top