There's a great article in the March issue of Harvard Business Review that talks about the Six Ways Companies Mismanage Risk. What's interesting is that, while a portion of it comes down to the governance and processes some organizations have in place, the majority of the issues seem to be related to having the appropriate information and doing the right type of analysis and reporting.
I culled from this article what I thought were the challenges that could be addressed through better use of information:
Relying on historical data
- Rapid financial innovation of recent decades made historical data less useful
- Never re-examined or updated risk models
Lack of integrated view
- Not understanding correlations across asset classes and portfolios or relationship of different types of risks – hedging typically focuses on one type of risk, while ignoring others
- “It is critical to measure risk in ways that cut across organizational silos” to truly understand all the material risks to which a firm is exposed
Narrow measures of risk
- Traditional daily measures don’t capture full exposure
- Requires increased metrics
Unreported risks
- Lack of transparency/visibility into all activity and related risks
Accelerating rate/pace of change
- Requires real-time/intraday visibility and adjustments
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