Are financial crisis events devaluating risk management as discipline? With the collapse of Merrill Lynch, Bear Stearns, HBOS and Northern Rock, companies were able to use risk management as a predictive tool. Can this credibility be renewed?
Not just in an emergency.
In the past decade, all kinds of risk management tools and techniques have been created. They have allowed financial companies to grow at a far greater rate than others. In addition, these tools can undoubtedly cause the financial crisis we see. Over the past year, big financial institutions spent over $ 400 billion, and governments have collected record debt to support survivors and liquidity market failures. Is it better not to trust risk management anymore?
This is not the first time we saw risk errors
This financial crisis is not the first time risk management has come to a standstill. The Black Monday of 1987, the LTCM in 1998, the dot com bubble breaking in 2001 and the collapse of Enron are all examples of serious risk management mistakes. Trading strategies and risk management tools have become increasingly sophisticated and trust and confidence have increased. Why? Because we overwhelmed and learned our mistakes or ignored it and bury it in the sand. Generally speaking, companies that embroidered and understood risk management, including the limitations that have increased their competitive position.
Describe the Limits of Risk Management
Today, we help customers understand the strengths and limitations of risk management. By balancing the need to create a shareholder value by creating the appropriate risk profile and implementing the relevant management controls, we help them rebuild their trust. We also implement management structures and procedures, and are able to handle and understand large amounts of data and embed a risk management culture within the organization. We will never be able to remove the risks – but we can understand how destructive it can be and create the right mechanisms to ensure that an organization does not.
Culture is Key
Financial institutions must first and foremost re-examine their corporate culture. Obviously, there is a relationship between the company's culture and success. Companies with risk-absorbing and understanding cultures perform well; the staff is familiar and comfortable with the risk, well-trained and empowered to make decisions quickly, but most importantly, they understand that private individuals should not endanger the company's finances and reputation. Likewise, this means that control functions must be the authority of the Board of Directors (and trust) to be able to curb the decisions of the front office where they consider it appropriate.
Data Consolidation for Reporting Is Essential
Risk management and control functions need to be properly funded and resources must be provided to ensure that they keep pace with the rapid innovation of financial instruments. The extent of the latest history and the speed of change have been resolved in the fight against risk function in order to maintain proper supervision. Recognition of profits has also been involved in making informed choices about whether or not there is a risk that the organization should run on a daily basis. This does not mean that risk reports have not occurred and the risk committees have been disregarded, but the quality of the data, the reporting hierarchy of the organization, and the lack of the risk report's significance at the relevant level of consolidation. Companies need to focus on understanding the potential losses of macroeconomic factors and not underestimate risk risks. Investing in data and management reporting tools will lead to increased trust in decision-making.
Can it be rebuilding credibility in risk management? It may take time, but it should be built within a short time. Every day we are in danger, in everything we do. It would be a serious mistake for financial institutions to come to the conclusion that addressing risk effectively is too difficult or dangerous. We do not say that the road will be easy, but trust will re-establish. There is a need to check reality and to examine the real limits of risk management. and to ensure that risk management is sound and transparent. Most importantly, risk managers need to trust in relying on the data and information they use to make decisions.
Distinct helps clients integrate risk management at a strategic level to help address regulatory needs, support decision making, and sustainable growth. Risk Analysis and Statistical Modeling, Risk Assessment, Six Sigma Techniques for Risk Measurement and Management and Risk Analysis and KPI Design and Embedding
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