Did Risk Management Cause the Crisis?

I would like to comment on the article posted on the class website: Did Risk Management Cause the Crisis? Yes and no. Improper risk management (accounting controls) does not take the place of enterprise risk management.

The failure was due to a failure in maintaining and enacting appropriate risk management behaviors. Risk Management did not fail and did not cause the crisis. The lack of RM was the cause. Therefore, the RM strategies and ideas do not need to be destroyed and started over from scratch because they work for companies that implement them properly. Risk Management is not a guarantee that bad things won't happen, but firms must experience some risk to create value.

The failure also came from blind reliance on models. In class we discussed that a company's risk does not always follow a normal distribution. This is how the economy is: disasters can occur and surprises can occur. The organizations that fail do not pay enough attention to the tails in the distributions just as we discussed. Tails can be fatter than expected or predicted, which means that points are farther from the mean. These investments are more risky.

I found this article very interesting. It helped me distinguish between enterprise risk management, risk management, and financial risk management. The article defines Enterprise RM as risk management that can identify situations in which risk may be a competitive advantage instead of only a threat. "ERM encompasses all aspects of an organization in managing risks and seizing opportunities related to the achievement of the organization’s objectives… not only for protection against losses, but for reducing uncertainties, thus enabling better performance against the organization’s objectives." Our RMI 4350 class is titled Enterprise Risk Management, and we have been discussing this process exactly: identify risks and then form a plan to minimize the costs of risk to maximize the firm's value.

http://community.rims.org/RIMS/Upload/f26b1c64-8123-4c96-9c59-83fc43bc99cb.pdf