Football is about more than just Shoes
Of course it is. The equipment never wins the game. It never runs the game. But a team that shows up without proper equipment has only a slim chance of prevailing.
And ERM is about more than just models. Some people have mistakenly equated ERM with Economic Capital or VAR models. That makes no more sense than the idea that football is all about the shoes.
Football is about having the right team, assigning the the right roles, setting the strategy and finally mostly about execution. If you asked 1000 experts about football, few if any of them would even list the shoes.
But for ERM, you do need to also find the right people, assign the the right roles, set the risk strategy and execute.
So why have models found their way into the debate about ERM in financial affairs?
Models in general and Economic Capital in specific has become central to the ERM process because insurers and banks have traditionally used very crude and very different approaches to measuring risks, when they actually did try to measure them. It is difficult to believe that an industry that exists by taking on risks from others like insurance would not have a clear tradition of measuring how much risk it was taking on in any clear and consistent way.
The methods that tended to be employed by insurers worked when the risks that they were taking stayed the same over time. When the risks could be adequately tracked by reference to something that indirectly tracked with the level of the risk. But when businesses and people and markets are changing the nature and level of risk constantly, those old relationships completely broke down.
The promise of economic capital and VaR models is to replace the old rules of thumb with timely and consistent scientific assessments of risk.
But even if that promise is achieved, the insurer or bank has only then got to the point of buying shoes for their football team. Now they need to start training and coaching the team and watching to see how the team performs, providing feedback and constantly making adjustments as the other teams adjust their teams and strategies.
So the model is a start but it is the start of the football season, not even the start of the playoffs.
You have the shoes now play the game.