Subprime crisis shows why firms need ORM


Of course, the answer to that apparent paradox is that many of the firms that sparked the subprime mortgage crisis were not regulated but non-bank banks. But that doesn't excuse the US regulators, legislators and others who should have had a firmer handle on what these lenders were doing and how it was affecting the financial system. But the blame for this crisis cannot to be laid only at the door of regulators, government bodies and central banks.

Financial services firms tend to have a "stop me before I kill again" attitude to these crises. It was the world's top firms who packaged subprime loans into nifty structured products without understanding how the risks inherent in those products would behave under stress. Now they are blaming anyone but themselves.

Risk management is, above all, an exercise in knowing thyself (and thy firm). Understanding the personality of a firm, including its strengths and weaknesses, is essential to creating any kind of enterprise-wide risk management framework.

One of the most important areas where this applies is the new product approval process - an area in which operational risk managers have played a significantly greater role in recent years. So what happened? Were concerns raised about the structured products firms were churning out? Why did firms feel they would meet the "front page" test - where seeing the product on the front page of the Wall Street Journal isn't a reputation-destroying exercise? And what's gone wrong?

Structured products are an important innovation in the financial markets and subprime mortgages are also a useful product. Neither is inherently evil - but clearly transactions have been undertaken that will dent their reputations, and the reputation of the firms that engaged in them, over the short-to-medium term.

Operational risk is, once again, a fundamental component of the cause of a crisis in the financial services industry. When will the industry, in turn, acknowledge the importance of operational risk and resource the discipline proportionately?

Ellen Davis, Editor

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 or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

Investment banks: the future of risk control

This survey report explores the current state of risk controls in investment banks, the challenges of effective engagement across the three lines of defence, and the opportunity to develop a more dynamic approach to first-line risk control

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here