RISK MANAGEMENT AND 2008 CRISIS

RISK MANAGEMENT AND 2008 CRISIS

John Kyriazoglou*

Could the 2008 crisis have been avoided?

Did risk assessment fail at the level of each company?

I think the answers are quite not so simple.

1. Some thinkers argue that the 2008 financial crisis could have been avoided and was the result of poor decision making both in Washington and at top financial firms that fostered a culture of excessive risk taking, etc.
2. In fact, the financial crisis was FUELED and ENABLED by a complex interaction of uncontrolled actions, flawed financial innovations, greed, etc., still going on today.
3. For example, triangular arbitrage transactions, foreign exchange derivative transactions, inter-group triangular company invoicing, offshore banking operations, and other close to not so 'legal' transactions take place all the time all across the planet.
4. But governments cannot control them, and in fact in several cases even encourage them by promoting ‘free trade’, declaring that ‘the markets will find their equilibrium and balance’, etc.
5. When the world has over 20 regulators, not at all coordinating with each other, it is impossible to control the market.
6. There is a potential conflict of interest in the role played by the central banks, as they are regulators, insurers for deposits, receivers for failed banks, lenders for various countries and banks, and auditors of banks (some of which are huge conglomerates which play both sides of the economy!, at times).
7. When corporate greed and exorbitant high profits are the norm by many, if not all, super-investors, you have a disaster in your hands! I think the regulators, the politicians, the think tanks and the academics will need to do more work to improve the whole situation, as regards risk management at the individual corporate level.
8. First of all let me make it clear, I am not against an 'ethical' profit, as risk and profit are the two sides of the same business coin. But the social impact and ramifications must be worked into the socio-economic equation.
9. Secondly, I think that before one examines ERM at the corporate level, you must come up with a new regulatory architecture and control regime that manages and controls the triangular and other issues I raised above and that incorporates corporate governance, ethics, compliance, risk, strategic and operational controls, accountability, and reporting, into a holistic model. We have various rules and guidance at the moment:, but NOT an integrated model acceptable by all economies and countries.
10. Thirdly, I would want and expect academics and think tanks to take the lead in this by studying what has gone wrong, assessing the various therapies and whether they have given us any good results as yet, and propose a new model for corporations to follow, even if it is as a pilot to be tested first, before making it a paradigm to follow.

John Kyriazoglou (jkyriazoglou@hotmail.com)

John Kyriazoglou, CICA, B.A (Hon-University of Toronto)
International IT and Management Consultant, author of several books
Profile:http://www.linkedin.com/pub/john-kyriazoglou/0/9b/919
Blog: http://businessmanagementcontrols.blogspot.com/
SSRN Free Publications: http://ssrn.com/author=1315434