Perils That Lie in Risk Management
Byline: ANTHONY HILTON
IT hardly bears thinking about but it is still less than 10 years since Nick Leeson brought down Barings bank and introduced the world to the concept of operational risk.
Similarly, it is less than 10 years since Shell was vilified for its environmentally sensible proposal to sink the Brent Spar oil platform in the Atlantic, and thereby introduced the world to reputational risk. In that age of innocence, no one talked about risk control. Regulators, auditors, ratings agencies and even businessmen speak of little else these days. A whole new science has grown up to meet the need.
Now that it is flourishing, it is time in that British way to have doubts.
Last night under the chairmanship of Sir Howard Davies, the London School of Economics hosted a debate entitled Are Risk Managers Dangerous? The thesis was that in the past decade, banks, investors and company bosses have invented ever more clever ways to deal with risky markets. They have created sophisticated mathematical tools to analyse the risks they face. They have dreamed up complicated " derivatives" and new forms of insurance to slice up risks and sell them to the people who want to bear them the most.
The debate sought to explore whether risk managers create an illusion of safety without delivering the reality. They have, after all, been at the centre of corporate disasters such as Enron. Have the practitioners of the new profession of risk management done more harm than good?
The arguments have two strands. Avinash Persaud, investment director of hedge fund GAM, took the line that two views are needed to make a market but modern risk control systems all basically work to the same principles, and so they will all deliver warnings at roughly the same time, meaning everyone will rush for the exit at the same time. Systems that provide individual protection collectively create, or threaten to create, an even greater systemic instability.
Professor Michael Power, on his home turf, followed a line he delivered earlier this year in a lecture entitled The Risk Management of Everything.
His thesis is that society requires professionals to give their honest judgments on the problems of the day but the culture of risk avoidance is leading to defensive medicine, defensive auditing and defensive legal opinions - and an absence of the honest opinions society needs if it is to function properly. …