Financial Risk Management in the 21st Century

Last week, an article in InformationWeek magazine profiled the current issues with the financial industry's risk management practices and offered some solutions.  The article compared the approaches to risk management in the financial industry to the design and production of computer chips.  Both are highly complex exercises.  However, risk management to date lacks the standardization and control found in chip manufacturing.  Here is what the article suggests as a solution.

The industry's kludge-filled, error-prone, and unsafe financial engineering needs to be replaced with a more secure financial infrastructure that's been tested and debugged to the level of a major chip release. Regulatory oversight won't be simple, but it doesn't have to be. It just has to work, every single day and for every single transaction. That's the type of change with the potential to jump-start a global economy.

Through stronger controls over data collection, improved networking among industry participants, and greater use of standards across a wider range of financial instruments, the future of the financial services industry can be assured in a way that enables a bright future for the rest of the economy. It's high time for the industry's circuits to get an upgrade.

The article provides a unique perspective on a major problem.  The solution is fairly obvious, but the task is massive and will require a significant investment to successfully implement.  However, our global economy and the financial services industry as a whole will suffer additional crisis situations in the 21st century without this sort of change.