Risks for risk managers

Comment

This month’s editor’s letter comes directly from Risk’s flagship Risk USA conference in Boston, where more than 400 of the great and the good have gathered to discuss the latest trends in the global risk management industry.

The breadth and depth of delegates at the event shows just how the industry is developing. Banks big and small, insurance companies, asset managers, quantitative analysts, academics, consultants, hedge funds and corporates are all here – providing a graphic illustration of just how many people at different types of institutions consider their role to be primarily that of a risk manager.

The range of topics under discussion over the two days shows how varied and fast-changing the industry is – how buy-side can firms use risk management to add value; an explanation of the sensitivity analysis of value-at-risk and the expected shortfall for portfolios under netting agreements; how investors and pension funds can effectively manage surplus risks; a case study of the correlated stochastic default and recovery values and their effects on structured credit products; and that’s about 10% of the first morning alone.

Events such as these are important for the industry as they provide a rare and invaluable opportunity to meet our peers, discuss trends, to learn, to educate and to promote discussion and debate – all of which are essential to the continued development of risk management solutions for institutions large and small.

And while much of the discussion will no doubt focus on the integration of risk management into companies’ strategic business, it’s sometimes a good idea to take a step back and look at the bigger picture of what risk management actually means.

That is exactly what Peter Fisher – now a managing director at fund manager Blackrock but perhaps best known as a recent undersecretary of domestic finance at the US Treasury – sought to do in the event’s opening address.

Fisher said that we paid a lot of lip service to risk being of central importance – but that in reality there was still a huge gap between the actual performance and behaviour of major companies when it comes to risk management.

And the most common failure, he argued, was to misrepresent risk management simply as a means to manage adverse outcomes.

Those who have famously fallen, such as Long-Term Capital Management, have largely done so for conceptual reasons – and often because of the inability to identify the major risks in a business and what that business’s objective really is.

To focus on what may go wrong means you are only looking at half the picture.

One of the major problems, said Fisher, were regulators and accountants who were always seeking a ‘right answer’ when there isn’t one, but which nonetheless forces risk managers to search for it. However, it’s the risk manager’s difficult task to ensure that his or her boss realises this is the case, and opens their eyes to the true value of risk management.

Back to the varied debates for now. But I guess the oldest of them all – ‘What is risk management’ – will be around for a while yet.

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