The Rise of Financial Risk Management

By Kurland, Orin M. | Risk Management, September 1992 | Go to article overview

The Rise of Financial Risk Management


Kurland, Orin M., Risk Management


OVER THE PAST decade, risk managers have witnessed both a greater acceptance of their discipline as well as a greater willingness on the part of companies to employ the term "risk management." In the banking and finance industry, however, these attitudinal changes have contributed to a situation where the manager of pure risk has gotten lost among the hordes of financial risk managers. What makes this situation prevalent here as opposed to other industries is the fact that the management of financial risk, alternatively known as market, balance sheet, speculative or, more generically, business risk, is the financial community's stock and trade.

Almost all traditional risk managers of operations and contractual risks, like William J. Kelly, senior vice president of risk management at Morgan Guaranty Trust Co. of New York, will get involved in financial risk management, but "only to the extent that there are insurance vehicles for these business risks such as credit insurance." Mr. Kelly will also get involved in contractual issues such as those related to lending and collateral for a new funding program. But that is about as far into the profit-generating area of the bank's activities his position takes him.

It is at this juncture that the company's other risk manager - the financial risk manager - takes over. It is this risk manager that must contend with interest rate risk (the risk that interest rates will rise and reduce the market value of an investment), credit risk (the risk that a borrower will be unable to make interest or principal payments in a timely manner), currency risk (the risk that the value of one's currency will rise or fall relative to another before payment is made), liquidity risk (the risk of having difficulty in liquidating an investment position without taking a significant discount from current market value) and market risk (the risk that it may be necessary to liquidate a position during a down period due to general market pressures). Financial risk management is perhaps the most volatile branch of the discipline, which is one reason why it tends not to be insurable.

Should the traditional risk manager be dealing with such financial issues or only those activities geared towards mitigating or eliminating what has been traditionally viewed as hazard, event or pure risk, such as physical damage, products liability or maybe even criminal activity? Or, as Dr. William R. Feldhaus, associate professor of risk management and insurance at Georgia State University puts it, "Should one manage positive, as well as negative, risk?" Dr. Feldhaus notes that at present, most universities and colleges limit the notion of risk management to the pure risk delineated in the traditional text books, allowing for professors to provide minor variation amongst their lectures.

Few, if any, would argue that the risk manager should become a specialist in all forms of the discipline, not even H. Felix Kloman, principal and vice president at Tillinghast, who advocates perhaps the broadest view of what a risk manager's job should entail. Mr. Kloman believes that the interrelationship between all four branches of risk management- operational, legal, political and financialnecessitates "an entirely new risk management function that would be on par with a chief strategy officer or a chief executive officer."

To illustrate his point, Mr. Kloman presents a scenario involving Philip Morris's reaction to the recent U,S. Supreme Court ruling opening up tobacco companies to an untold number of claims. "The risk manager there probably will look at the claims. But what the risk manager should be doing is questioning whether or not it makes sense to remain in this business at all." He adds, however, that currently "there are only a small handful of individuals who have the mandate to practice strategic risk management. But I believe this is the direction we are moving in."

Use and Abuse

DUE TO CHANGING government regulations, tax laws and heightened economic uncertainty stemming from the volatile 1970s, this past decade witnessed expanding responsibility for the financial risk manager and an extraordinary flurry of financial market innovations. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Rise of Financial Risk Management
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.