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Managing risk, and the Select Committee

12 February 2009 1 comment

Retired member

On February 11, 2009 the Treasury Select Committee interviewed five senior practitioners of the banking industry. This followed on after several days of interviews with similar figures from other banks, all active in the UK.

The evidence was interesting as it highlighted how little science there is in the ways risks and exposures are managed.

Complex risks demand complex solutions, or so we are told, not least by those selling complex solutions. The dilemma is, the complex solution is no easier to understand than the complex problem.

If quantum mathematics is used to model quantum chromodynamics, are we any more likely to understand the model than we are the reality?

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Stanley Epstein Associate at Citadel Advantage Group

15 February 2009

Complex risks can usually be broken down into a number of "simpler" or more basic "core" risks, each of which can be monitored and managed in a different way.

Beware of the "complexity" issue. It is often used to simply show how difficult it is to do anything at all, which then becomes the perfect excuse for doing nothing.

When the sub-prime crisis first emerged there were many pundits who proclaimed that securitization was simply too difficult for mere mortals to understand - so leave it to the "professionals" who "know what they are doing".

If there is nothing else that 19 years of risk management has taught me, it is that if it hurts profits it is bad news for a bank CEO. Either they will pay lip service to you advice or just ignore it.

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