Heads in the sand
There is a growing sense of disquiet in the risk community that risk management, rather than profiting in influence and heightened status from the fallout of the global financial crisis, has reverted to hiding risk exposures as banks attempt to restore investor confidence. This is a worrying development, but not all that surprising - the public image of bankers and financial services firms has taken a beating over the past year. It is also not a new phenomenon. The classification of risks, particularly the myriad of risks attributed to operations, has often been used as a way to reduce the perceived risk level within a firm. Firms even break up large losses into many different categories of risk so that they become less visible in loss databases.
But sources tell me that a new risk type has been invented along the borders of operational risk and strategic risk, known as governance risk. It's a classification of risk that as yet has no regulatory requirement attached and so there is no need for it to be quantified or included in any models. Governance risk, so I am told, is attributed to any loss caused by greedy executives. But surely such a sweeping definition could be applied to all losses made in connection to the recent crisis? The events of the past year have demonstrated a need for supervisors to re-evaluate the classifications of different risk types as the boundaries between them continue to blur. In the process of doing so, one would hope that a development such as governance risk will not stay off their radar for long.
Also this month, the question of whether operational risk can be modelled at all has again been raised thanks to a recent UK government report (see news page 8). The challenges of operational risk modelling are well known, but given the advances that have been made in this space by combining both qualitative and quantitative techniques, it could be argued that operational risk modelling is much more advanced that the outdated market and credit risk models, which failed abysmally to predict the financial crisis. That said, few firms are practising advanced op risk modelling techniques and there is a sense that answers need to be found to some fundamental problems if the discipline is going to continue to evolve and not be discounted altogether.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Risk management
Review of 2025: It’s the end of the world, and it feels fine
Markets proved resilient as Trump redefined US policies – but questions are piling up about 2026 and beyond
BofA urges horizontal CCP fix after CME outage, others demur
Analysts say clearing meltdown bolsters case for futures-for-futures exchange with FMX
One in five banks targets a 30-day liquidity survival horizon
ALM Benchmarking research finds wide divergence in liquidity risk appetites, even among large lenders
Bank ALM tech still dominated by manual workflows
Batch processing and Excel files still pervade, with only one in four lenders planning tech upgrades
Many banks ignore spectre of SVB in liquidity stress tests
In ALM Benchmarking exercise, majority of banks have no internal tests focusing on stress horizons of less than 30 days
Quant Finance Master’s Guide 2026
Risk.net’s guide to the world’s leading quant master’s programmes, with the top 25 schools ranked
ALM Benchmarking: explore the data
View interactive charts from Risk.net’s 46-bank study, covering ALM governance, balance-sheet strategy, stress-testing, technology and regulation
Staff, survival days, models – where banks split on ALM
Liquidity and rate risks are as old as banking; but the 46 banks in our benchmarking study have different ways to manage them