Calling for more foresight, less hindsight
The U.S. is leading the damage control effort, having spent a couple of trillion dollars bailing out its beleaguered institutions and now trying to separate their commercial and investment banking businesses. Strengthening risk management within the financial system is currently a top priority of U.S. regulators, and why not? It may be justifiably said that short-sighted lobbying of big U.S. institutions led to dilution of KYC norms and took systemic risk up to break point. It is this very systemic risk that cloaked the unsafe practice of sub-prime lending.
That’s not all. Sovereign risk can have widespread repercussions on the domestic economy especially when the defaulting nation is a key trading partner. Banks’ wariness about taking on any counterparty risk has created a liquidity crunch among banks. Managing market risk arising from liquidity, interest and exchange rate movements is becoming more expensive. And enough has been said about credit risk in the market.
Since the global economy is a world-wide web, risk can no longer be isolated. Sovereign risk leads to currency risk which in turn escalates market risk and so on in a vicious cycle. Any of these could increase the threat of reputation risk, which is the worst outcome for a business that is founded on trust.
So, where do banks go from here?
Strengthening risk assessment and mitigation measures is a no-brainer. Basel II norms have linked capital charges to risk exposure and the quality of its management, making it harder for banks that are on the edge. Basel III and G20, currently under deliberation, will likely progress the same agenda.
Since risks don’t operate in silos, neither can mitigation. Going forward, banks must take a holistic, enterprise-wide view of all risks, so that they can assess and address them more effectively than before. Foresight beats hindsight any day, don’t you think?
That’s not all. Sovereign risk can have widespread repercussions on the domestic economy especially when the defaulting nation is a key trading partner. Banks’ wariness about taking on any counterparty risk has created a liquidity crunch among banks. Managing market risk arising from liquidity, interest and exchange rate movements is becoming more expensive. And enough has been said about credit risk in the market.
Since the global economy is a world-wide web, risk can no longer be isolated. Sovereign risk leads to currency risk which in turn escalates market risk and so on in a vicious cycle. Any of these could increase the threat of reputation risk, which is the worst outcome for a business that is founded on trust.
So, where do banks go from here?
Strengthening risk assessment and mitigation measures is a no-brainer. Basel II norms have linked capital charges to risk exposure and the quality of its management, making it harder for banks that are on the edge. Basel III and G20, currently under deliberation, will likely progress the same agenda.
Since risks don’t operate in silos, neither can mitigation. Going forward, banks must take a holistic, enterprise-wide view of all risks, so that they can assess and address them more effectively than before. Foresight beats hindsight any day, don’t you think?
