Is There a Risk Paradox?

by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
www.RSDsolutions.com
info@RSDsolutions.com

As risk managers we are all aware of the credit paradox of banks. Banks become good at lending to a specific type of industry and then they start to attract more credit clients from that industry. This in turn gives the bank even more expertise in that industry, and thus they attract even more clients from that industry, and so on and so on. Eventually however the bank becomes too concentrated in that industry and that creates the credit paradox problem.

Now, here is a question – as risk managers, do we also develop risk paradoxes? Do we become so good at analyzing one type of risk that we start to make all of our analytical and conceptual techniques look the same? Do we become so focused on one aspect of risk that we miss the bigger picture? Do we become so mutually enamoured of a small number of methodologies that we as an industry introduce systemic risk into the system (for example see credit derivative analytical techniques, see LTCM, see VAR etc.)