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What is wrong with risk management in financial institutions? (From RWG member Martin Davies' blog)

Risk and Regulation Working Group (RWG) member Martin Davies shares his views on what he thinks are the issues in risk management that banks seem to be missing. Davies is "a risk architect focused on structured products for emerging markets and works with several tier one banks, regulators and brokerages across South East Asia". The post below first appeared on his blog and the following excerpt has been re-produced with his permission.

January 05, 2011 | Aditya Puri
A recent article about financial institutions what is wrong with risk stimulated me to think broadly about what is truly wrong with these banks, what is the crux of the problem?
I fair the industry misses several points in general; one of the most disappointing responses from regulators and governments around the world to the credit crisis was to punish the traders and sales teams of financial institutions by cutting their bonuses. In reality all these people were doing were their jobs, too well perhaps. The risk departments seemed to dodge the spotlight of attention to some degree and it is these control functions which should manage the depth of risk taking. On the point of risk people in general, of which I have met quite a few now, there are two kinds: Academically applied individuals that have insight into how the dynamics of markets work and general plebs who may have incredible qualifications but haven't read a book since they left university. This latter group generally lack expertise across the various disciplines in a bank to be of much use and generally focus on political campaigns to further their careers, they are an unpleasant morbosity for the bank and there are too many of them. Being a risk manager should be a vocation not a job and interviews should start with the first question "what...
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Capital & Strategic Issues, Credit Risk, Operational Risk, Risk And Regulation Working Group

Keywords:Market Risk, Regulation