Reserve Bank chief: Institutions subverted risk management for short-term profits

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The GFC exposed the weaknesses of risk management to the world, but lessons can be drawn from the experience to improve the collective futures of risk managers and their organisations.

These are the thoughts of Reserve Bank of New Zealand Assistant Governor and Head of Operations Don Abel.

Speaking at the Oceania Computer Audit, Control and Security Conference this week, Abel declared that risk management remains “absolutely critical to the success of institutions”.

Abel explained to the Wellington audience that he had examined how the GFC exposed the weaknesses of risk management to the world, “especially the inadequacies of institutions that allowed their risk management practices to be subverted by the drive for short-term profitability”.

“The irony is that, despite its lack of strength in the decades building up to the GFC and its ultimate failure, risk management remains absolutely critical to the success of institutions,” he said.

As institutional language is now coloured by words such as “austerity, crisis, collapse, disaster response, instability, volatility, vulnerability and, above all, uncertainty,” Abel argued that – rather than assuming better regulation and policy interventions will reduce excessively risky decisions and act as market stabilisers – it is ultimately the people involved in the key roles of institutions, as well as their skills and values, that largely determine the future of the enterprises.

“Accountability, honesty, responsibility; these sorts of well-founded values must be present in the culture of institutions if they are to survive in a rapidly evolving and highly uncertain environment,” he said.

He added the stark warning that “innovative financial products” should be treated with a great deal of scepticism, and that understanding where the true risks lie and how they could play out when economic fortunes change is paramount.

“Another lesson is that poorly managed risks may take years to be realised. The build-up of risk on financial institutions’ balance sheets, which was uncovered by the GFC, was created over a number of preceding years,” he added. “Enterprises need to take a long-run view of its business – not a myopic, short run, approach.”

Anticipation, said Abel, is ultimately where successful risk management lies. Not the “ambulance at the bottom of the cliff”.

Do you agree with Abel’s strong words? Have your say by commenting below.

 

  • Donna Dufty on 17/09/2012 8:59:12 AM

    I agree with Abel when he says that risk management remains “absolutely critical to the success of institutions". I also agree when he says that business’s "allowed their risk management practices to be subverted by the drive for short-term profitability". All too often the "bad news" won't be escalated or is ignored in the "tick and flick" risk management exercises that are prevalent in business today. In an effort to save money businesses rely on Risk Management software, although these are too inflexible and have created a cut and paste process that does not inspire actual thought about what risks or issues are likely to arise and what needs to be done to lessen their impact. Effective Risk Management can save much more than it costs when used correctly, and the best way to do that is to employ Risk Management advisors that are well trained and experienced rather than relying on software that just doesn't measure up.

  • Peter Kwang on 14/09/2012 8:36:08 PM

    I totally disagree with Don Abel's conclusion that risk management failed the world and caused GFC. Rather the GFC is one of the consequences of top and senior management not appreciating, supporting and properly applying sound risk management principles, framework and processes in their decision making procedures. Other contributory factors are greed,"we won't fail" attitude, negligence, ignorance and poor controls.

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