LIVE from the ERM Symposium
(Well not quite LIVE, but almost)
The ERM Symposium is now 8 years old. Here are some ideas from the 2010 ERM Symposium…
- Survivor Bias creates support for bad risk models. If a model underestimates risk there are two possible outcomes – good and bad. If bad, then you fix the model or stop doing the activity. If the outcome is good, then you do more and more of the activity until the result is bad. This suggests that model validation is much more important than just a simple minded tick the box exercize. It is a life and death matter.
- BIG is BAD! Well maybe. Big means large political power. Big will mean that the political power will fight for parochial interests of the Big entity over the interests of the entire firm or system. Safer to not have your firm dominated by a single business, distributor, product, region. Safer to not have your financial system dominated by a handful of banks.
- The world is not linear. You cannot project the macro effects directly from the micro effects.
- Due Diligence for mergers is often left until the very last minute and given an extremely tight time frame. That will not change, so more due diligence needs to be a part of the target pre-selection process.
- For merger of mature businesses, cultural fit is most important.
- For newer businesses, retention of key employees is key
- Modelitis = running the model until you get the desired answer
- Most people when asked about future emerging risks, respond with the most recent problem – prior knowledge blindness
- Regulators are sitting and waiting for a housing market recovery to resolve problems that are hidden by accounting in hundreds of banks.
- Why do we think that any bank will do a good job of creating a living will? What is their motivation?
- We will always have some regulatory arbitrage.
- Left to their own devices, banks have proven that they do not have a survival instinct. (I have to admit that I have never, ever believed for a minute that any bank CEO has ever thought for even one second about the idea that their bank might be bailed out by the government. They simply do not believe that they will fail. )
- Economics has been dominated by a religious belief in the mantra “markets good – government bad”
- Non-financial businesses are opposed to putting OTC derivatives on exchanges because exchanges will only accept cash collateral. If they are hedging physical asset prices, why shouldn’t those same physical assets be good collateral? Or are they really arguing to be allowed to do speculative trading without posting collateral? Probably more of the latter.
- it was said that systemic problems come from risk concentrations. Not always. They can come from losses and lack of proper disclosure. When folks see some losses and do not know who is hiding more losses, they stop doing business with everyone. None do enough disclosure and that confirms the suspicion that everyone is impaired.
- Systemic risk management plans needs to recognize that this is like forest fires. If they prevent the small fires then the fires that eventually do happen will be much larger and more dangerous. And someday, there will be another fire.
- Sometimes a small change in the input to a complex system will unpredictably result in a large change in the output. The financial markets are complex systems. The idea that the market participants will ever correctly anticipate such discontinuities is complete nonsense. So markets will always be efficient, except when they are drastically wrong.
- Conflicting interests for risk managers who also wear other hats is a major issue for risk management in smaller companies.
- People with bad risk models will drive people with good risk models out of the market.
- Inelastic supply and inelastic demand for oil is the reason why prices are so volatile.
- It was easy to sell the idea of starting an ERM system in 2008 & 2009. But will firms who need that much evidence of the need for risk management forget why they approved it when things get better?
- If risk function is constantly finding large unmanaged risks, then something is seriously wrong with the firm.
- You do not want to ever have to say that you were aware of a risk that later became a large loss but never told the board about it. Whether or not you have a risk management program.
This entry was posted on April 17, 2010 at 9:37 pm and is filed under Action, Assumptions, Change Risk, Cultural Theory of Risk, Disclosure, Economic Capital, Emerging Risks, Enterprise Risk Management, ERM, Execution Risk, Financial Crisis, Governence, Mark to Market, Modeling, Operational Risk, Options, People Risk, Regulatory Risk, Risk, Risk and Light, risk assessment, Risk Culture, Risk Identification, Risk Learning, Risk Limits, Risk Management, risk transfer, Risk Treatment. You can subscribe via RSS 2.0 feed to this post's comments.comment below, or link to this permanent URL from your own site.