Risk managers warned of ‘liquidity black holes’

Speaking at Risk’s annual European conference, he told delegates that increasingly sophisticated software used throughout the industry is causing a clustering effect in decision making. The Asian financial crisis was an example of a liquidity black hole that was created by risk analysis systems, he said.

He told risk managers to identify slow moving, structural long-term correlations with which to diversify portfolios. Short term, cyclically correlated assets would be more vulnerable to change properties in times of crisis, he added, making the portfolio more susceptible to liquidity black holes.

He advised risk managers to avoid homogeneity in the industry and to use simple processes. He also gave a strong warning against the dangers of implementing single risk analysis systems throughout large corporations.