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
Welcome to The Journal of Computational Finance's Online Early Forum. Here you will find the latest peer reviewed, accepted papers before they are available in print. With Online Early publication,...
This paper presents a simple approximation for the noarbitrage drifts that appear in Libor market model SABR-family term structure models.
This paper develops a new financial product that allows the profit-and-loss sharing (PLS) principle to be enforced recursively in practice.
Welcome to The Journal of Risk's Online Early Forum. Here you will find the latest peer reviewed, accepted papers before they are available in print. With Online Early publication, users can access...
Sign up for Risk.net email alerts
Sponsored video: MarketAxess
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.