Regulation 3

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

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.

Venture Capital

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

As part of my preparation to teach a seminar on advanced investment techniques, I have been reading up on what the latest is in the field of venture capital.  In going through old interviews and notes I had compiled the one thing that struck me about venture capitalists that being their desire to have someone leading the company who is flexible.  Every venture capitalist hates to have someone who is overly passionate about an idea.  An overzealous entrepreneur is likely someone who will not be willing to change course when things inevitably do not go as planned.  It is considered far better from the VC’s point of view to have someone who has a general idea, rather than a fully articulated plan that they are determined to stick with through thick and thin.

 

I believe there is a lesson here for risk managers.  As a profession we tend to be like over-planned overzealous entrepreneurs who demand to have every detail thought out in advance.  While planning is obviously a necessity, it is possible to over-plan.  It is also possible to be overly committed to a plan.  That goes for a business plan or for a risk plan.  Things will happen.  Things will change.  Assumptions will prove to be incorrect.  Economic shifts will happen.  When the inevitable happens, commitment to a plan can be just as costly as not having had any kind of plan at all in place.  Just like a venture capitalist, you need to learn to know when and how to be flexible.

 

Now if we could only get regulators to understand that point.