Risk Management and the Financial Crisis

Thomas H. Stanton

in Why Some Firms Thrive While Others Fail

Published in print July 2012 | ISBN: 9780199915996
Published online September 2012 | e-ISBN: 9780199950324 | DOI:
Risk Management and the Financial Crisis

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Chapter 5 looks at risk management and the financial crisis. Risk management involves balancing risk and returns so that a firm enhances value to itself and its shareholders. The organizational structure of risk management involves a choice between keeping risk management separate from revenue-producing activities or embedding risk managers in revenue producing units. These choices are not nearly as important as having a culture in the firm that respectfully takes risk perspectives into account. Risk officers need support from the CEO and the board. Otherwise they cannot do their jobs in the face of pressures for the company to reap what appear to be easy profits. Judgment is critical. Economist Frank Knight long ago distinguished risk, which can be quantified, from uncertainty, which requires judgment. Successful firms used judgment to add more protection than quantitative modelling would have suggested by itself.

Keywords: risk; uncertainty; judgment; financial modelling; risk officers; returns

Chapter.  10718 words. 

Subjects: Financial Markets

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