Risk Management Lessons Worth Remembering from the Credit Crisis of 2007-2009
Interesting risk management paper from BlackRock:
Click Here To Read: Risk Management Lessons Worth Remembering From The Credit Crisis
Abstract (Via SSRN)
This paper presents eight general principles of risk management and eight important lessons worth remembering from the Credit Crisis of 2007-2009. The Credit Crisis has clearly demonstrated the importance of a strong, independent risk management function and our eight basic principles of risk management will help institutions to craft the foundation of their risk management organizations. The Credit Crisis has also revealed the inadequacy of many standard methods in quantitative risk management and called into question the efficiency of markets in general. Our analysis of these eight lessons from the Credit Crisis provides insights into what went wrong and offers advice on how institutions can attempt to correct for these failings in the future. Detailed analysis is provided on risk management issues relating to liquidity, securitized products, certification, market risk, and policy risk.
Principles Risk Management
1. Relatively flat hierarchy – senior management is seen as being abreast of what is actually
happening across the institution;
2. Trust/credibility – stakeholders believe in the intentions of the institution;
3. Non-bureaucratic – stakeholders believe that things can get done within the institution;
4. Non-political – stakeholders believe that the institution is a meritocracy and that individuals will
be judged fairly based on their contributions;
5. Good internal communications – stakeholders must believe what the institution says and to the
extent that the institution is perceived to be disingenuous or incompetent, cynicism will arise; and
6. Common information and transparency – to the maximum extent appropriate and permissible,
stakeholders should be able to have access to shared information about the institution’s operations
so that there is a common source of trusted information. By empowering stakeholders, institutions
permit them to understand the tradeoffs faced by the institution. This culture of openness will
facilitate the surfacing of bad news from the bottom up in an expedited manner. An open and
honest institution will empower information to percolate up throughout.
8 Proposed rules:
Risk Management Requires Institutional Buy-In
The Alignment and Management of Institutional Interests Are Critical to Risk Management
Independent Risk Management Organizations
Define Your Fiduciary Responsibilities
Bottoms-Up Risk Management
Get the Risk Takers to Think Like Risk Managers
Risk Models Require Constant Vigilance and Skepticism
Risk Management Does Not Mean Risk Avoidance
Click Here To Read: Risk Management Lessons Worth Remembering From The Credit Crisis
