Risk Management in Financial sector

"If a bank is serious about risk management, then it will be serious from the top down.” Before discussing this statement, it is important to understand the events that precipitated it.

The chain of events that led to the global economic crisis are outlined in figure 1. The resulting global economic downturn led to a vicious cycle of companies failing or downsizing, thus leading to unemployment, which further reduced demand for goods and services. In addition, banks across the globe retrenched and in place of the liberal lending practices credit tightened across the board. Governments stepped in with fiscal support—the likes of which has never been seen in modern recorded history. And now, everyone waits to see what will happen with this never-before-tried experiment of flooding the world markets with government money.

What happened? Why did everything turn so bad so fast when it looked like the good times would go on unabated and it appeared that the very predictable five- and 10-year recession cycle had been overcome?

Different people like to point fingers at different culprits. Some experts put the blame on credit default swap instruments that were sold worldwide with promises of high returns and low risk. Others blame those who promoted mortgage access to people who normally would not qualify for a housing loan. But we believe that the issue is more fundamental: The world’s financiers lost sight of the requirement to manage risk effectively and, in many cases, it is questionable if the basics of risk management were ever put in place.