We need risk management that can deal with both the known unknowns and those unknown unknowns
2. Can private sector risk management keep risks under control?
Not alone…
Because, the capacity and the incentives to take risks have clearly overwhelmed any improvements in risk management. Risk management is about quantifying the infrequent, that is, assessing tail risks, where by definition experience is sparse. Even stress testing has been caught out, failing to consider those seemingly remote possibilities that have, in fact, come to haunt us over the last two years. 3 In short, we need risk management that can deal with both the known unknowns and those unknown unknowns.
Regarding the larger-scale process of market discipline, the record here can only be described as disappointing. That individual financial firms failed to manage their risks is bad enough; that their counterparties allowed them to is worse. 4 Market discipline fell short not only with respect to firms, but also with respect to instruments.
Translation: We need clear, honest financial reform to protect you and me from “Wall Street” being able to do stupid things again.
The Bank for International Settlements (BIS) is an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks.
Established on 17 May 1930, the BIS is the world’s oldest international financial organisation.