Times, UK: Diversity and Risk management

From the Times: The failure of financial institutions to manage risk and the role this has played in creating today’s economic crises has created awareness of the need for a new risk-management approach. This may well become the new Holy Grail of financial economics. There are two essential constituents: first, developing a more diverse mindset regarding financial risk; and second, applying more powerful techniques to capture financial reality than risk managers have used in the past. A new method for risk management does not mean that all elements of the present system must be replaced or that all the discredited financial instruments they spawned should be discontinued. Discrimination is needed: Many existing techniques have validity, but only in certain market conditions; and innovative financial products can contribute to wealth creation, but only if they are used judiciously. A new approach must start by understanding the reasons for the failure of risk-management systems. Why did risk models grossly understate risks? Why did managements fail to understand this? And why did regulators fail to provide effective checks and balances against the banks’ risk-management mistakes? ( Read the entire article.)

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