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October 17, 2009

Will social networking work in risk management?

End of 08, when the crisis was showing its worst fear and we all were simmering in the lay-off storm, my partner in Infosys consulting who also heads GRC practice asked me a pertinent question - " Will social networking work in risk management?" Being a devoted risk practitioner, my immediate counter question was - "do we have a valid business case?" I was all in the negative of the existence of this concept in risk world. Social network / commerce etc was to me the world of facebook, twitter and at max it has relevance to the realm of wealth management. Risk mgmt, a blunt "NO". But I was wrong.....Foot in mouth

Economy has just traversed one year from rock-bottom and here I am raising my arms in support of social commerce in risk space. Few days back, I happened to come across this discussion in one of the risk conferences where emminent panelist, from industry & consulting, were gungho on promoting this concept. As rightly said- "There is a silver lining". Present crisis has not only aggravated due to silly risk mitigation, but has also pushed firms to better it, optimize it, improve it. And one such path would be to understand not only oneself more, but also understand the neighbour better via social networking.  Yes of course, it's all about knowing the risk of the neighbour.

Social networking among risk managers helps achieving following things:-

  • Best practice sharing- Citi does not need to know the exposure level or liquidity state of JPMC, but it does make sense to have Citi risk manager discussing the risk frameworks, controls with JPMC manager. Remember this crisis has clearly shown how vulnerable a company would be in a stressed condition (evenif it's financialy solvent) if its contemporary in same industry is doing a risky business which catapults to systemic imbalance and subsequently massive retraction. Sharing best practice is no more a option, it's a culture financial market definitely needs and that can be achieved effectively with social networking. One of my previous blog posting last year was also highlighting same thought.
  • Systemic risk understanding - Another great admisssion from present global meltdown is the proliferation of risk across geographies & markets with the formation of contagion- in nutshell the systemic risk. Everybody wanted a pie of the sub-standard mortgage bubble - either directly or indirectly. That bubble turned to tornado and all swept away. A Glodman never prioratized to know what Morgan Stanley betting on and so as Citi to B of A. There are risks which go beyond enterprise risk program. That's when organization have to understand each other - X shoud try to gauge the risk situation of Y, otherwise it's quite possible that Y may kill X at certain point. So to understand systemic risk, risk managers should chat around table or within social network mediums. A medium leveraging modern information technology infrastructure would help bridging geographies among risk community- a Deutsch Bank market risk manager, stationed at Singapore, can always take a cue from a Goldman counterpart at NYC.

There is always a ROI if financial institutions, for the sake of effective risk mgmt, promote & create social networking medium for risk managers and I believe there is an alternate route if non-profit organizations like GARP, PRMIA, SIFMA take this as one of their prime initiatives in this turbulent period.

So, do we really need social networking in risk functioning - my vote will be yesLaughing, let me know your stand.