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ERM – Lessons learnt since the financial crisis and where practices are still lagging

Posted on by aldopuch

Lessons learnt after the crisis

With signs that the global financial crisis is on the wane; five years after the fall of Lehman Brothers  analysts are asking what lessons, if any, have been learnt along the way.  To this end Treasury & Risk put a series of questions to US actuary and financial risk management consultant Max Rudolph. Max not only helps organisations to assess their risk levels, he also conducts extensive research and authors an annual survey of emerging risks for the Society of Actuaries.

 

Four bubble risks in the global economy

In general Max is critical about organisations which do not seem to have learnt from the lessons of the past.  He identifies four bubble risks in the global economy: excessive leverage, the rise in farmland prices, the high yield credit risk market and the movement to make loans more accessible all point to risk areas which are a cause of continuing concern.

In addition, Max says that whilst extreme weather events such as Hurricanes Katrina and Sandy have resulted in organisations spreading their geographic supplier risk; when it comes to financial risk companies are still tending to stick with the herd rather than stand up and say that “this practice doesn’t make any sense.”

Partly, this is as a result of pressure from investors combined with the short-termism resulting from the need to meet instant profitability targets.  Although smaller family run businesses have the ability to stand out from the crowd, more mainstream organisations have to operate under a continuing pressure of “profit now” and this means that scenarios which could result in risks occurring in ten or even twenty years are not considered .

Max cautions that companies do need to change their mindset and look at emerging risks from a long term perspective, to assess the positive and negative consequences of an action or technological development.

Improved risk management practices

Despite this, there are signs that in some areas at least organisations have changed their practices for the better.  For example, in response to risk surveys, organisations are increasingly reporting that they are looking at a range of what-if scenarios and applying different stress tests to current data.  In addition, companies are looking to overturn internal silos and manage risk more holistically.

The successful organisations are those which not only drive risk management from the top but also encourage a “bottom up” approach.  Max agrees that encouraging everyone to question and take a more hands on view of risk can require a culture change but the rewards can be substantial.

If you want to read the whole interview go to the article on Risk & Treasury

If you want to learn more about effective strategies for managing risk you can attend a course organised by Eureka Financial in London and Dubai.

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Eureka Financial offers over 100 public and in-house training courses in banking and finance, corporate finance and M&A, risk management, operations, investments, wealth management, soft skills and management. For more details visit: www.eurekafinancial.com

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