Risk managers are heading back to the drawing board after finding their systems were incapable of flagging up the perils that have brought the financial and corporate worlds to their knees.
First developed more than a decade ago, the concept of enterprise risk management (ERM) has gained increasing prominence. Complex and seemingly advanced risk management strategies gave banks and corporations the confidence to invest in instruments and areas that previously would have been deemed too speculative. With a sophisticated risk management system backing them up, what could go wrong? The answer, as it turned out, was “everything.”
There is no doubt that the systems for identifying and managing risk have become more sophisticated and, in many ways, more effective. But they are far from perfect, and if relied upon too heavily, they can be downright dangerous. Analysts believe that much of the recent carnage in the corporate and financial worlds has been the result of over-reliance on complex models coupled with a series of poor communications choices and a misguided zeal for satisfying compliance standards, which together helped drown out the warning signals of even the best corporate ERM programs.
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