The Changing Face of Risk Management
Risk has gone through three distinct phases over the last 30 years. The changes have reflected both the external focus on the financial services industry from regulators and the way that technology has changed what’s possible. It’s a process that’s likely to continue as the industry strives to achieve a balance between hazard and opportunity, suggests Anthony Pereira, founder and CEO of Percentile, risk management and regulatory compliance technology specialists.
In the late eighties and early nineties, when you talked about risk to a financial institution, the chances are you’d be focusing on credit risk: the potential that a trading partner or counterparty might not be able to meet their obligations and leave a bank with bad debt. Recognising the threat to their bottom-lines, most financial institutions became adept at developing mechanisms and systems that would warn them about potential issues, and, broadly speaking, the industry came to an effective way of quantifying trust.
Around the turn of the century, the focus for Risk Management moved from credit risk to market risk, and the potential for adverse market movements to expose positions and cause losses. Again, financial institutions became proficient at ensuring that trading positions were balanced, taking a wider view of their markets to minimise the potential that they could be caught with an exposed position. While some traders would complain at the time that this reduced their room for manoeuvre, most now accept that it’s improved the financial services industry’s stability.
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