Does risk management minimise or add risks?

The recent Bernanke speech is another (read this Volcker speech for instance) of those ongoing illustrations of the ongoing practices in financial sector.

This Bernanke speech focuses on the risk management practices being followed in the industry. On reading the speech I have two questions to ask:

1. The Title of the post
2. Risk management is one of the most sought and highly paid job. So what were these people doing really? It is useful to debate this issues post crisis but what was going on really?


2 Responses to “Does risk management minimise or add risks?”

  1. Avid reader Says:

    I didn’t read the speech. So forgive me if I sound nonsensical.

    I am not sure the people in powerful positions really understand all the risks. Finance has changed in a massive way and it doesn’t seem like everyone has kept themselves abreast with the changes. Banks created superb risk management practices and got lulled into believing that they were safe. A lot of it involved computerized risk management models that were backward-looking. All they had to do was step outside of their offices to see what was going on around them. They didn’t. In fact, as long as money was made, they closed their eyes to the risk involved. A famous recent case in point was the one at Societe Generale (it wouldn’t turned into such a huge loss if handled properly but that is a different matter). Also, there is a problem with the way bankers are rewarded/compensated. It allows them to collect rewards now and stick all the risk for a later year. The international financial system needs a lot of reforms but considering the enormous power it wields, it will a long while before anything happens.

    I think what was going on was that risk managers produced their reports and they were ignored because huge amount of revenue through fees and trading were being made.

  2. Moody’s tries to save itself « Mostly Economics Says:

    […] Four notches lower? This is simply unacceptable. Even if there was a model error (which is quite common) one can’t get a lower rated product become a super rated category. And one can still understand these things happen at a fund but how can they happen at a credit rating agency. Surely, there is back-testing and other kinds of risk assessment tests which would have separated wheat from the chaff. As I had asked earlier, What were the risk managers doing? […]

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