Responding to the financial crisis

Risk management is a combination of both art and science with the view to predict and manage the uncertain future. The financial crisis has provided us in the risk management fraternity to demonstrate the value proposition in managing risks.

Unfortunately in the midst of risk framework and processes, documentation, workshops to discuss risks and not to mention countless meetings, risk management in my view has become an academic exercise of identifying risk drivers or factors, assessing impact of these factors onto the exposures we have, and developing mitigation plans and strategies.

This creates the perception that is what risk management is all about when there is another important element : execution of the identified mitigation plans and strategies, putting to test the practicality of the strategies that shows much promise and provides assurance to management in beautiful PowerPoint slides and therefore, manage risks.

Therein lies the fundamental problem : That those in enterprise wide risk needs to have the perspective of reality facing businesses in managing the business portfolio and the risks and that it is not just about managing downside risks but also upside risks, and making the risk-return trade off decisions just as one would in the portfolio optimization, generating maximum returns for a stated level of risk, or minimizing risks for a stated level of return.

In the situation that we face arising from the financial crisis, we were caught unprepared because perhaps we have been dealing with known risks but not the unknown and unknowable. When the crisis hits, while the speed of which we responded during and post crisis, but were we prepared for the potential financial repercussions?

For example, we have always operated under a situation where access to banks and credit has been so many years that when credit conditions tightened considerably, it became difficult for companies, be it our customers or suppliers, to function as a business. Was banking system risk in our list of potential risks?

Right now what was risk management has turned into crisis management in our efforts to assess our ability to ride this financial turmoil. The crisis should be viewed as an opportunity to assess again the risk management value proposition, and lessons learnt can definitely be turned into shaping the practice of risk management in this organization centering on key elements of risk governance, risk integration, risk infrastructure and last but not least, the act of managing risks.

For those who are interested, I am in the midst of preparing lessons learnt from the financial crisis and long-term ramifications in shaping the practice of risk management.

Please note that this is my personal observation and does not in anyway denote that current risk management efforts are futile, but opportunities exist in re-shaping the risk management practice and transforming risk management as a competitive edge.