Poor risk management leads to overreactions in face of crisis

The recent subprime mortgage crisis exposed narrowly focussed risk management programs in financial institutions around the world, which could lead to overreactions when unforeseen or damaging events arise, a TowerGroup report notes.
In “Multifunctional Integration: The Positive Side of Risk,” researchers noted that most financial services institutions are predominantly risk-averse. But as the balance between product mix and capital adequacy shows greater variance, business models are becoming noticeably polarized with progressive institutions understanding and managing risks and financials more holistically.
“Risk analyses that are ‘siloed’ in one area of an institution may exaggerate the danger attached to new products or services, thus leading institutions to stifle innovation and forgo growth opportunities,” said Guillermo Kopp, executive director and global research fellow at TowerGroup, and author of the research.
“On the other side of the coin, poor integration of risk management across an organization masks the interdependencies of risk and financial indicators, potentially exposing financial institutions to severe losses,” Kopp said.
“Unfortunately many institutions only become aware of their risk management pitfalls once a lapse in controls or unforeseen interdependencies between events causes a major business problem.”