Italian Earthquakes

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

A few weeks ago a story came out of Italy that most people brushed aside as a quirky news story.  Risk managers with much better things to do than worry about quirky news stories probably paid no attention whatsoever – but they should have!

The story I am talking about was the conviction of Italian scientists for manslaughter because they were not being able to predict the deadly 2009 earthquake.  To those who understand the state of the art of earthquake science this was pure foolishness.  To the Italian courts it obviously was not.

Why is this important to risk managers?  Simple – if convictions can be made based on the inability to predict earthquakes, how far behind are convictions for not being able to predict (and prevent) the actions of a rogue employee, or a financial debacle, or a systems failure, or a manufacturing mistake, or any of the other countless things that happen daily in the course of managing an organization?

Director’s insurance is de-rigour.  How long before risk manager’s insurance is as well?

Risk Charisma

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

It seems that every management or business journal has on the cover the smiling mug of a charismatic leader.  This raises the question of whether or not risk managers should be charismatic.  In my impression this would go against the stereotype of risk managers.  I suspect the Hollywood version of a risk manager is someone who never smiles, has a constant worry furrow creasing their forehead, and talks in grave and measured tones.  Not the epitome of charismatic.  But what if that were changed?  What if the face of risk management was changed from pessimistic to optimistic, from boring to exciting, from dull to charismatic?  Wouldn’t that perhaps help to push the risk agenda along? 

Movember

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

We are now two weeks into Movember – the fund raising month for prostate cancer research where men grow mustaches in the hopes of raising money for prostate cancer research.  It is a worthy cause, and II have to admit that having an excuse to have a silly mustache for a month prompted me to grow a ‘stache (it also prompted my wife to ignore me for a month …)

Of course prostate cancer has been in the news over the last few months after U.S. health officials declared the PSA test was causing more harm than good.  The PSA test (Prostate-specific antigen test) has for years been a recommended procedure for men in their 40’s and 50’s.  With early detection, the prognosis for someone with prostate cancer is generally quite good.  Thus the PSA test was highly recommended, and widely recommended.

Many men with prostate cancer live full lives with few to no adverse effects of the cancer.  Of course it must be said that the cancer can be deadly as well.  However, the rise of PSA testing has led to many men having biopsies performed, and these biopsies can have adverse effects.  Thus it becomes a trade-off between the harm caused by the follow-up biopsies, versus the usually, but not always benign effects of the cancer itself. 

The decision of whether or not to have a PSA performed is a discussion that each man should have with their physician.  I am not advocating one way or the other, and that is not the purpose of this blog.

What I do want to point out in this blog is the interesting fact that many physicians are asking whether the preventative medicine (or preventative test in this case) is causing more harm than good.  I think that we as risk managers also have to ask if some of our actions to prevent even the most minor downside risks might have unintended consequences or side-effects that are also causing more harm than good. 

Meanwhile, I wonder if my wife would notice if I again grew a mustache for Movember …

Complexity, Future of Financial Intermediation and Regulation

By Don Alexander, MBA
Associate, RSD Solutions Inc.
Mr. Alexander also lectures at NYU and SunySB

Since the onset of the financial crisis, what financial regulatory structure will deliver the right balance between growth and stability?  Finance and financial innovation are essential to growth, but finance is a two-edged sword. Indispensable for growth, the financial system can grow so large that it turns into a drag on activity. As recent events indicate, the fundamental links between the real economy and the financial system make it difficult to isolate the former from shocks originating in the latter.

This means that the size and structure of the financial system have aggregate real consequences. These externalities justify regulation.  And regulation, while necessarily focusing on the incentives and actions of individual agents and institutions, has systemic stability as its ultimate objective.  This is a question that Stephen Cecchetti, of the BIS, addresses is a recent speech The future of financial intermediation and regulation (October 2012).  What should the financial system look like 20 years from now, and how should we design financial regulation to deliver it?  Answering this question requires that we know what we want the financial system to do and what a financial institution is to look like – its size, scope and complexity – its appropriate role in the economy.

The main role of banks acting as intermediaries includes: pooling savings, safekeeping and accounting, providing liquidity, risk-sharing, extension of credit and information services.  In addition some of the larger banks provide: payment services across borders and currencies, underwriting securities for