Page 42 - Risk Management in current scenario

LESSONS FROM GLOBAL FINANCIAL

CRISIS ON FAILURE OF RISK

MANAGEMENT

T he world witnessed a number of financial crisis starting with "The

Great Depression" in late 1920s; failure of banks in 1980s in
Europe, Japan and US; Asian banking crisis in 1990s; Scandinavian
banking crisis in Norway, Sweden and Finland in 1990s and finally, the
Global Financial Crisis ("GFC") in 2008-09. A distinctive feature of GFC
was that, the crisis happened during the Basel-II regime where financial
security of banking system was placed on three pillars (Quantitative,
Qualitative and Disclosure requirement) which supposed to have worked.
The cause of concern could be for solvency-II which is also based on
similar three pillar approach. Banking industry must have invested vast
sum of money to comply with these requirements and yet the results
are poor.

Though the front end cause of GFC was collapse of housing bubble and
sub-prime lending; the back end causes of GFC was failure of risk
management and corporate governance within the financial institutions
in US. Many studies suggest that Board at top of the ladder did not
enforce good risk management practices, they were inadequately trained
in financial services and their compensation was not aligned to long term
interest of the Company.

Role of Board

The Board failed to oversee the governance and risk management issues;

40 | Risk Management in Current Scenario