Risk Management after the Great Crash

Hans Blommestein ()

Journal of Financial Transformation, 2010, vol. 28, 1-19

Abstract: This study takes a closer look at the role of risk (mis)management by financial institutions in the emergence of the Great Crash. It is explained that prior to the crisis too much reliance was placed on the quantitative side of risk management, while not enough attention was paid to qualitative risk management. In this context it is argued that there is an urgent need for dealing more effectively with inherent weaknesses related to institutional- and organisational aspects, governance issues and incentives. More sophistication and a further refinement of existing quantitative risk management models and techniques is not the most important or effective response to the uncertainties and risks associated with a fast-moving financial landscape. In fact, too much faith in a new generation of complex risk models might even lead to even more spectacular risk management problems as during the Great Crash. Against this backdrop, the most promising approach for improving risk management systems is by providing a coherent framework for addressing systematically weaknesses and problems that are of a qualitative nature. However, given the inadequate and very imperfect academic knowledge and tools that are available, risk management as a scientific discipline is not capable of dealing adequately with fundamental uncertainty in the financial system, even if a coherent picture associated with the aforementioned qualitative issues and problems is being provided. This perspective is providing an additional motivation to those authorities that are contemplating to constrain or restructure parts of the architecture of the new financial landscape.

Keywords: Financial Crisis; Quantitative and Qualitative Risk management (search for similar items in EconPapers)
JEL-codes: G01 G12 G18 G32 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1413

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