The Risk Overhaul: The new Framework for risk management.

A brave new world for the global economy was proclaimed by the attendees of the recent G20 summit as a $1 trillion economic stimulus package was accompanied by the promise of a “stronger, more globally, consistent, supervisory and regulatory framework”. The Basel-based Financial Stability Board (formerly the Financial Stability Forum) will be home to this super-regulator and it has already announced that a responsible and accountable approach to risk-taking will be its key priority. Risk managers will be in a state of keen anticipation as they await further details of how the Financial Stability Board’s new responsibilities will play out in a legislative context relative to the existing network of national regulators. We have been here before of course, following the market crashes of the late 1980s. Back then we saw the growing clout of the Basel Committee (originally created in 1974 amid an even earlier crisis brought on by the first Arab oil embargo) and the publication of global guidelines for risk management, engineered to prevent any systemic risk in the global banking market. As recent events have shown, the Basel Accord and its 2001 sequel failed to prevent the systemic economic breakdown that occurred in 2008, leading many to blame the inadequacies of the expensively assembled mathematical risk models that failed to see it coming. Certainly risk management practices have fallen short. Nevertheless, the problems are not merely technical and tinkering with technical procedures will not prevent future crises. The deeper problem is organizational and cultural. As the risk management profession considers its future, it is important to take a step back and, before making decisions regarding systems, models and specific stress tests, take a closer look at the role of risk managers in the overall financial system, with specific focus on who their underlying stakeholders are and how best to serve them.