cfo.com

cfo tagline

Disaster Averted?

A torrent of bad news for business may be good news for enterprise risk management.

Russ Banham, CFO Magazine
April 1, 2011

Black Swan? Oh really?.....

Congratulating Russell on his analysis of systemic risk management deficiencies requiring correction with the application and supervision of a coherent international regulatory framework which addresses the real core causes of the global crisis with the raising of capital standards. This applies equally to market risk as to credit risk factors. Basel III is a notable step forward, however as full implementation is delayed until 2019, it remains some years before we will see this gaping black hole plugged in what is a sensible and appropriate level of proportional capital as measured by VaR (aggregate and in all the required variants and not just parametric). Basel whether 2 or 3 demands capital compliance through this correct and thorough modelling. Consider the issue of serious temporal dysphasia between nanosecond capable front end e trading systems and lethargic batch processes of several days from t-1 close which obliges asset managers to "fly blind" for several days at any given closing position. As I have pointed out in white papers; it is impossible to consider any level of reserve capital adequate if one does not know what ones risk exposure actually is. Clearly we cannot wait several days before we know from a partial VaR modelling which take up to 3 days to complete our capital requirement. We are subject to market risk, credit risk, liquidity risk, insolvency risk and through interconnected lending and counterparty liability exposure; systemic risk. Mr Caleb's attempts to explain this all away as a "Black Swan" event, or something which was in no way predictable and is a random act of God which no insurer could have foreseen and only happens once every 5 centuries is simply incredible as a coherent proposition given the facts. The Japanese earthquake and tsunami was a Black Swan event as were the many natural disasters of recent years. The credit bubble, the securitisation of credit risk severing the link between lender and borrower, inadequate credit risk checks on overvalued properties in an overheated market, grossly incorrect instrument ratings, over complex collateralised securities with various levels of counterparty insurance unrelated to capital adequacy from insurers whose reserve capital was vastly inadequate to cover downside risk who later collapsed, improperly managed risk systems and procedures, and a lack of capital adequacy to cover clearly present risk is by no possible definition or interpretation any black swan event. It is a systematic failure to manage risk correctly. The only possible solution was massive Keynesian interventions and Central Bank buy backs of the toxic investments to prevent liquidity shock, mass insolvency and a collapse of the global economic system. Right decision to address a problem which should never have been allowed to grow to such pandemic proportions without regulatory and supervisory interventions. So; No Black Swans here in this global lake. A series of systemic weaknesses and deficiencies which were clear, obvious and building, cheap credit improperly managed and controlled fuelling a large cyclical bubble disproportionate to underlying asset valuations in a radically overheated market and a systemic failure to measure and manage risk in relation to safe, compliant and responsible capital standards. Add in the temporal dysphasia between front end operations and middle office risk management protocols and systems creating not so much myopia as ostrich like head in the sand blissful blindness to the charging elephant in the room; what we are left with is not any unforeseeable black swan event. This much vaunted concept is merely a palliative placebo with no basis in fact. What we have is the perfect recipe for the China syndrome, which is not only what we have but economically is also in some respects curiously apposite.

Posted by David Bristow | April 14, 2011 09:01 am

ERM article

I agree with the others that this is an excellent article. I see ERM projects and the software solutions that support them as provding that structure so critical to achieving the goals set by the firm's management as noted in the article by Mona Leung of Alliant. ERM survey results for 2010 conducted by the Economist Intelligence Unit (EIU) (survey sponsored by SAS) reflected many of same trends as those discussed in the article from the Deloitte survey. One trend worthy of highlighting is that of data. As many readers know, the success of ERM projects in many ways rests on the ability of the firm to integrate risk data from the various siloed systems to provide that full, firm-wide view of various categories of risk (market, credit, etc.). In the EIU survey results, just 39% of of survey respondents said they are good at collecting, standardising and storing data needed for risk management. For firms embarking on ERM projects, focusing on risk data management and integration in the early project stages will increase the project success factors. SAS did provide the risk management solution that supports the project at Alliant; readers may find additional information on the project at: http://www.sas.com/news/preleases/alliant-oprisk.html David Wallace SAS Industry and Solutions Marketing

Posted by David Wallace | April 12, 2011 01:40 pm

Great Article

Nice article, Russ. Clearly, ERM has a ways to go. I agree with the three trends your article asserts may propel ERM to a new level of acceptance and maturity. To that end, Protiviti recently published an issue of The Bulletin entitled, "Risk Management: A Look Back and a Look Forward." It is available at our website at: http://www.protiviti.com/en-US/Insights/Browse-by-Content/Newsletters/The-Bulletin/Documents/Bulletin-V4-I6-Protiviti.pdf. This issue of The Bulletin discusses 13 developments under two broad themes that will increase the relevance of risk management over the next several years. The two themes are (1) integration of risk management with core management processes and (2) advancement of risk measurement and monitoring. The three trends you cite are pervasive throughout two themes.

Posted by James Deloach | April 09, 2011 12:08 pm

Great Article

Nice article, Russ. Clearly, ERM has a ways to go. I agree with the three trends your article asserts may propel ERM to a new level of acceptance and maturity. To that end, Protiviti recently published an issue of The Bulletin entitled, "Risk Management: A Look Back and a Look Forward." It is available at our website at: http://www.protiviti.com/en-US/Insights/Browse-by-Content/Newsletters/The-Bulletin/Documents/Bulletin-V4-I6-Protiviti.pdf. This issue of The Bulletin discusses 13 developments under two broad themes that will increase the relevance of risk management over the next several years. The two themes are (1) integration of risk management with core management processes and (2) advancement of risk measurement and monitoring. The three trends you cite are pervasive throughout two themes.

Posted by James Deloach | April 09, 2011 12:08 pm

ISO 31000 Standards

I would suggest ISO 31000 for enterprise risk management programs. It provides principles and guidelines on enterprise risk management. Helping to harmonize many existing ERM standards that vary by region or industry. ISO 31000: Principles and Guidelines on Implementation IEC 31010: Risk Management - Risk Assessment Techniques ISO/IEC 73: Risk Management - Vocabulary Mike Corcoran GVP Partners Governance, Value Management, Performance

Posted by Mike Corcoran | April 01, 2011 03:32 pm

CFO Publishing Corporation 2009. All rights reserved.