The value and limitations of financial risk management

13-03-13

Door Henk-Jelle Reitsma

The previous decade I have spent some 80% of my working time consulting on risk management for financial institutions. The other 20% is an enriching and diverse mishmash of various disciplines and industries. Risk management in a financial services (FS) environment has become almost synonymous with financial risk management in the context of Basel II/III. I’ve always been interested to see how risk management works in other industries, for example the chemical companies. Whereas the focus in FS is historically on credit risk and then ‘the rest’ (e.g. operational risk), the chemical industry has a historic anchor point in operational risk and then ‘the rest’ (e.g. market risk).

Credit, operational and market risk are for banks the three building blocks under Basel pillar 1. The last years I have come to see that most work on pillar 1 is nothing more or less than a good basis for any sophisticated financial institution, whereas the real risks and the real benefits are to be found in operational risks (pillar 1) and other risks for which Basel provides a slot in pillar 2.

Consider that a bank is a car…

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