20/20 Hindsight

This week, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing into the lessons learned in risk management oversight at federal financial regulators.  Not surprisingly, all of the representatives from each regulatory agency agreed that risk management practices in the institutions they regulate must be strengthened.  Here is what Mr. Timothy Long from the Office of the Comptroller of the Currency had to  say.

The unprecedented disruption that we have seen in the global financial markets over the last eighteen months, and the events and conditions leading up to this disruption, have underscored the critical need for effective and comprehensive risk management processes and systems. As I will discuss in my testimony, these events have revealed a number of weaknesses in banks’ risk management processes that we and the industry must address. Because these problems are global in nature, many of the actions we are taking are in coordination with other supervisors around the world. 

More fundamentally, recent events have served as a dramatic reminder that risk management is, and must be, more than simply a collection of policies, procedures, limits and models. Effective risk management requires a strong corporate culture and corporate risk governance. As noted in the March 2008 Senior Supervisors Group report on “Observations on Risk Management Practices During the Recent Market Turmoil,” companies that fostered a strong risk management culture and encouraged firm-wide identification and control of risk, were less vulnerable to significant losses, even when engaged in higher risk activities.

Hindsight certainly is clearer given the magnitude of the recent economic meltdown.  However, these views must remain with us as we emerge from this downturn and inevitably enter better economic times.