Published on June 24th, 2013 | by Simi
Mark Lawrence: The new post-crisis paradigm for financial risk management
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The global financial crisis was a catastrophic failure of financial risk management and risk governance in many of the world’s largest financial institutions. Following the unacceptably high cost to shareholders, taxpayers and citizens associated with the crisis, these failures have been intensively studied by both the private and public sectors, and key lessons have been learned. In consequence, over the past 4 years we have witnessed the creation of a new global regulatory framework for banks, including new limitations on bank business models in some jurisdictions, substantially increased capital and liquidity requirements, strengthened bank supervision and a new focus on systemic risk. Importantly, we are now also seeing the active and progressive creation of a new paradigm for financial risk management in the largest financial institutions, which includes an explicit focus on institutional culture, the requirement to carefully define and articulate the institution’s “risk appetite” and link this directly to its growth strategy, an increased emphasis on stress-testing, and a diminished reliance on statistical risk models – in light of their revealed weaknesses and an increased appreciation of their limitations.
In this talk for a general audience we will highlight some key lessons learned from the risk management failures which were evident in the financial crisis. We will describe the principal elements of the new paradigm for financial risk management which is now emerging, and which might be expected to have potential implications for the discipline of risk management more broadly, beyond financial services. We will also discuss some of the key challenges that financial industry participants and regulators are currently grappling with, including challenges associated with the appropriate design and use of risk models.[subscribe2]