by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
In a few weeks I will be running a risk management seminar for a group of senior managers of a major financial institution. The basic purpose is to bring them up to speed on some of the latest developments in risk management thinking and practice, challenge them in their thinking, create an enriching dialogue, and overall help them to hone their skills and stay risk sharp.
The institution I am running this session for is one of the recognized leaders in risk management practice. As an institution they are very proactive in having best in practice risk management policies and are amongst the intuitions I work for that are at the leading edge of regulation. They are a very interesting group to work with. I have a huge amount of respect for their risk management team – which of course might be a self-serving bias.
There is one issue that will come up in the course of my session with the risk managers that will cause all to reconsider some assumptions. As mentioned this is an institution that is on top of the changing landscape for financial institution regulation. This institution spends a lot of time, energy and effort to be so. However in our session we will discuss the value of regulation as a risk management tool. We will discuss whether a financial institution really needs two sets of risk tools – those for regulation and those for risk management (much like a firm has two (or more) sets of financial statements for tax reporting, for financial reporting and for managerial reporting).
There is an assumption that regulation – particularly in the financial services sector – is a risk management tool. It’s not. Regulation might be many things, and you no doubt have your own views about the value of regulation, but we all need to remember that regulation is not risk management. Those who depend on regulation as their risk management tool are doomed to a life of unnecessary risk.
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