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 | Six Ways Companies Mismanage Risk |
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Harvard Business Review Heft 03, Jahrgang: 2009 86 – 94 Rene M. Stulz |
| Schlagworte: |
| Risk Management |
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Six Ways Companies Mismanage Risk It’s often said that no one saw the current financial crisis - which has led to the world wide economic disaster - coming. The author of this article tells us otherwise. He quotes an article from the Financial Times from November 2007, well before the crisis hit: “It is obvious there has been a massive failure of risk management across most of Wall Street“. So it was clear to some that risk was being poorly managed; according to the author they managed to perfrom badly in six basic ways. These are:
Let’s take a look at the more important points raised in this analysis. Using the experiences from the past to forecast the risk in the current situation is fraught with danger. Basing house price volatility forecasts on that which happened in the past could produce false confidence about what will happen now: there is the knock on effect of falling prices which cause further sharp falls in surrounding dwellings. There is also the problem of holding complex securities relating to sub-prime mortages - types of financial products which did not exist in the past. Banks have used daily Value-at-Risk (VaR) to determine exposure to the risks of securities trading. However if there is extreme volatility in the market the bank can exceed the upper limit of VaR that it has set. (This happened to Swiss bank UBS). Thus the bank may have insufficient capital to support the risks it is taking. Also VaR does not give an indication of catastrophic losses that have a small probability of occurring. Financial institutions can overlook such ’knowable’ risks as: those outside the normal class of risks; those related to hedging strategies used to manage risks already identified; those risks which pertain to a market dominated by one or two large institutions; those relating to changes in normal trading behaviour. There is also concealed risk. This occurs where traders at the firm’s securities desk receive incentives for the profits they generate but aren’t penalised if their trades result in losses. Thus there is incentive to take on risk - but not to report it as that may result in directives against assuming such risks. If a firm has a state-of-the-art risk management system, there can be an unwarranted confidence in the capabilities of the system. Finally it’s difficult to manage risk when the market varies so rapidly and wildly. As the author dramatically puts it: “Figuring out the right hedge when markets are moving rapidly is like trying to change an insurance policy on a house while it is burning.“ Against this gloomy landscape the author has a simple recommendation: don’t invest more so as to better track risk: instead augment the current models with scenario analyses of how a financial crisis might un-fold depending on how your firm and other large companies react to the crisis. |
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(Laurie 23.03.2009) |
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