 The challenges of risk management in diversified financial companiesChristine Cumming and
Beverly Hirtle
Journal of Financial Transformation, 2001, vol. 3, 89-95 Abstract: In recent years, financial institutions and their supervisors have placed increased emphasis on the importance of consolidated risk management. Consolidated risk management, also referred to as integrated or enterprise-wide risk management, can have many specific meanings, but in general it refers to a coordinated process for measuring and managing risk on a firm-wide basis. Interest in consolidated risk management has arisen for a variety of reasons. Advances in information technology and financial engineering have made it possible to quantify risks more precisely. A wave of mergers, both in the United States and overseas, has resulted in significant consolidation in the financial services industry as well as in larger more complex financial institutions. The 1999 Gramm-Leach- Bliley Act seems likely to heighten interest in consolidated risk management, as the legislation opens the door to combinations of financial activities that had previously been prohibited. This article examines the economic rationale for managing risk on a firm-wide, consolidated basis. Both financial institutions and supervisors agree on the importance of this type of risk management. However, the ideal of consolidated risk management, which may seem uncontroversial or even obvious, involves significant conceptual and practical issues. As a result, few if any financial firms have fully developed systems in place today. The absence thus far of fully implemented consolidated risk management systems suggests that there are significant costs or obstacles that have historically led firms to manage risk in a more segmented fashion. We argue that both information and regulatory costs play an important role here by affecting the trade-off between the value derived from consolidated risk management and the expense of constructing complex risk management systems. In addition, substantial technical hurdles remain in developing risk management systems that span a wide range of businesses and types of risk. All of these factors are evolving in ways that suggest that the barriers to consolidated risk management are increasingly likely to fall over the coming years. Keywords: Risk management; financial institutions; diversified financial organizations; consolidated risk management; In recent years; financial institutions and their supervisors have placed increased emphasis on the importance of consolidated risk management. Consolidated risk management; also referred to as integrated or enterprise-wide risk management; can have many specific meanings; but in general it refers to a coordinated process for measuring and managing risk on a firm-wide basis. Interest in consolidated risk management has arisen for a variety of reasons. Advances in information technology and financial engineering have made it possible to quantify risks more precisely. A wave of mergers; both in the United States and overseas; has resulted in significant consolidation in the financial services industry as well as in larger more complex financial institutions. The 1999 Gramm-Leach- Bliley Act seems likely to heighten interest in consolidated risk management; as the legislation opens the door to combinations of financial activities that had previously been prohibited. This article examines the economic rationale for managing risk on a firm-wide; consolidated basis. Both financial institutions and supervisors agree on the importance of this type of risk management. However; the ideal of consolidated risk management; which may seem uncontroversial or even obvious; involves significant conceptual and practical issues. As a result; few if any financial firms have fully developed systems in place today. The absence thus far of fully implemented consolidated risk management systems suggests that there are significant costs or obstacles that have historically led firms to manage risk in a more segmented fashion. We argue that both information and regulatory costs play an important role here by affecting the trade-off between the value derived from consolidated risk management and the expense of constructing complex risk management systems. In addition; substantial technical hurdles remain in developing risk management systems that span a wide range of businesses and types of risk. All of these factors are evolving in ways that suggest that the barriers to consolidated risk management are increasingly likely to fall over the coming years. (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1274 Access Statistics for this article Journal of Financial Transformation is currently edited by Prof. Shahin Shojai More articles in Journal of Financial Transformation from Capco Institute 77 Water Street, 10th Floor, New York NY 10005. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.