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Risk Management in the News

I was delighted to hear a lengthy discussion on this morning’s Radio 4 “Today” programme about risk management in the context of capital requirements for British banks.  Sir John Vickers, who headed up the Independent Commission on Banking has queried whether proposals that the Bank of England has put forward are strong enough.

Whilst I am delighted that any risk management topic is receiving such high-profile media coverage, I’m still not sure what lessons this debate provides for risk management more generally.  Whilst in many areas of human activity we appear to be getting better at managing risk, through a combination of better data, better analysis and more opportunities to transfer risk; the debate about risk capital for banks seems to suggest that we don’t even really know how great the risk is, let alone how to mitigate it.

The Basel II regulations introduced globally in 2006 sought to incentivise banks to manage risk better by allowing them to reduce the capital held if they could accurately quantify their risk: has this approach now been abandoned?  Why is the focus still on banks maintaining reserves of capital rather than trying to improve risk management?  Alternatively, if we are saying that we simply cannot model and manage these risks, should we not be looking at ways to ensure that banks can fail gracefully (without impacting on you and me); rather than this illusory goal of trying to guarantee that they will not fail in the first place.