The credit market is currently at a standstill, ratings are plummeting and the stock markets are experiencing extreme volatility, fuelled by the fear of a deepening crisis. Meanwhile central bankers are grappling with the conundrum of managing the underlying economy whilst somehow restoring market confidence as national governments continue to debate just how extensive their bailout packages should be.
A failure to implement robust risk management practices has been cited as a principal cause of the current conditions and as financial institutions retreat to the relative safety of the boardroom to consider a new approach to risk management, one age-old issue has been pushed to the forefront of the debate - just how much control should be awarded to the risk management division?
This issue has created a tension that is rarely resolved within financial institutions - traders see risk departments as "business prevention units", yet a failure to give risk managers the authority needed to ensure more control renders them dangerously ineffective. What is needed is an integrated approach that has traders and risk managers working from the same base, where each is able to understand the logic behind the actions of the other.
If implemented effectively, such a strategy will not only bring greater transparency to the ‘limits' process but also engender a greater level of co-operation between traders and risk managers and reinvent the risk management function as an effective profit centre.
More on Risk Management
This issue of The Journal of Risk Model Validation commences with a paper by Pilar Abad, Sonia Benito Muela and Carmen López Martín entitled "The role of the loss function in value-at-risk comparisons",...
ABSTRACT We demonstrate how introducing economic variables into a credit scorecard improves the predictive power of that scorecard. Such a scorecard can forecast default rates accurately, even when economic...
ABSTRACT In this paper, we discuss the evolution of the financial economic events that preceded the triggering of the subprime crisis. This crisis shares similarities with episodes that occurred in the...
ABSTRACT This paper examines whether the comparison of value-at-risk (VaR) models depends on the loss function used for such a purpose.We showa detailed comparison for several VaR models for two groups...
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