Heads in the sand
There is a growing sense of disquiet in the risk community that risk management, rather than profiting in influence and heightened status from the fallout of the global financial crisis, has reverted to hiding risk exposures as banks attempt to restore investor confidence. This is a worrying development, but not all that surprising - the public image of bankers and financial services firms has taken a beating over the past year. It is also not a new phenomenon. The classification of risks, particularly the myriad of risks attributed to operations, has often been used as a way to reduce the perceived risk level within a firm. Firms even break up large losses into many different categories of risk so that they become less visible in loss databases.
But sources tell me that a new risk type has been invented along the borders of operational risk and strategic risk, known as governance risk. It's a classification of risk that as yet has no regulatory requirement attached and so there is no need for it to be quantified or included in any models. Governance risk, so I am told, is attributed to any loss caused by greedy executives. But surely such a sweeping definition could be applied to all losses made in connection to the recent crisis? The events of the past year have demonstrated a need for supervisors to re-evaluate the classifications of different risk types as the boundaries between them continue to blur. In the process of doing so, one would hope that a development such as governance risk will not stay off their radar for long.
Also this month, the question of whether operational risk can be modelled at all has again been raised thanks to a recent UK government report (see news page 8). The challenges of operational risk modelling are well known, but given the advances that have been made in this space by combining both qualitative and quantitative techniques, it could be argued that operational risk modelling is much more advanced that the outdated market and credit risk models, which failed abysmally to predict the financial crisis. That said, few firms are practising advanced op risk modelling techniques and there is a sense that answers need to be found to some fundamental problems if the discipline is going to continue to evolve and not be discounted altogether.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Risk management
During Trump turbulence, value-at-risk may go pop
Trading risk models have been trained in quiet markets, and volatility is now looming
Osttra to launch Treasury clearing middleware
Mid-year delivery expected for system that aids credit checking for repo trades
Banks divided over CME’s done-away model for UST clearing
Buy side could give thumbs-up if questions on margin protection and guarantee fees are answered
Why JP Morgan’s Santos wants to make bad news travel fast
Asset management CRO says sharing information early holds the key to avoiding surprises
Mitigating model risk in AI
Advancing a model risk management framework for AI/machine learning models at financial institutions
BoE warns over risk of system-wide cyber attack
Senior policy official Carolyn Wilkins also expresses concern over global fragmentation of bank regulation
Treasury clearing timeline ‘too aggressive’ says BofA rates head
Sifma gears up for extension talks with incoming SEC and Treasury officials
Strengthening technology resilience and risk controls against multidomain disruption
The consequences of multidomain disruption and best practice strategies to enhance digital resilience