Advanced Search
MyIDEAS: Login to save this article or follow this journal

The challenges of risk management in diversified financial companies

Contents:

Author Info

Abstract

In recent years, financial institutions and their supervisors have placed increased emphasis on the importance of consolidated risk management. Consolidated risk management, also referred to as integrated or enterprise-wide risk management, can have many specific meanings, but in general it refers to a coordinated process for measuring and managing risk on a firm-wide basis. Interest in consolidated risk management has arisen for a variety of reasons. Advances in information technology and financial engineering have made it possible to quantify risks more precisely. A wave of mergers, both in the United States and overseas, has resulted in significant consolidation in the financial services industry as well as in larger more complex financial institutions. The 1999 Gramm-Leach- Bliley Act seems likely to heighten interest in consolidated risk management, as the legislation opens the door to combinations of financial activities that had previously been prohibited. This article examines the economic rationale for managing risk on a firm-wide, consolidated basis. Both financial institutions and supervisors agree on the importance of this type of risk management. However, the ideal of consolidated risk management, which may seem uncontroversial or even obvious, involves significant conceptual and practical issues. As a result, few if any financial firms have fully developed systems in place today. The absence thus far of fully implemented consolidated risk management systems suggests that there are significant costs or obstacles that have historically led firms to manage risk in a more segmented fashion. We argue that both information and regulatory costs play an important role here by affecting the trade-off between the value derived from consolidated risk management and the expense of constructing complex risk management systems. In addition, substantial technical hurdles remain in developing risk management systems that span a wide range of businesses and types of risk. All of these factors are evolving in ways that suggest that the barriers to consolidated risk management are increasingly likely to fall over the coming years.

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 3 (2001)
Issue (Month): ()
Pages: 89-95

as in new window
Handle: RePEc:ris:jofitr:1274

Contact details of provider:
Postal: 120 Broadway, 29th Floor New York, NY 10271
Phone: +1 212 284 8600
Email:
Web page: http://www.capco.com/

Related research

Keywords: Risk management; financial institutions; diversified financial organizations; consolidated risk management; In recent years; financial institutions and their supervisors have placed increased emphasis on the importance of consolidated risk management. Consolidated risk management; also referred to as integrated or enterprise-wide risk management; can have many specific meanings; but in general it refers to a coordinated process for measuring and managing risk on a firm-wide basis. Interest in consolidated risk management has arisen for a variety of reasons. Advances in information technology and financial engineering have made it possible to quantify risks more precisely. A wave of mergers; both in the United States and overseas; has resulted in significant consolidation in the financial services industry as well as in larger more complex financial institutions. The 1999 Gramm-Leach- Bliley Act seems likely to heighten interest in consolidated risk management; as the legislation opens the door to combinations of financial activities that had previously been prohibited. This article examines the economic rationale for managing risk on a firm-wide; consolidated basis. Both financial institutions and supervisors agree on the importance of this type of risk management. However; the ideal of consolidated risk management; which may seem uncontroversial or even obvious; involves significant conceptual and practical issues. As a result; few if any financial firms have fully developed systems in place today. The absence thus far of fully implemented consolidated risk management systems suggests that there are significant costs or obstacles that have historically led firms to manage risk in a more segmented fashion. We argue that both information and regulatory costs play an important role here by affecting the trade-off between the value derived from consolidated risk management and the expense of constructing complex risk management systems. In addition; substantial technical hurdles remain in developing risk management systems that span a wide range of businesses and types of risk. All of these factors are evolving in ways that suggest that the barriers to consolidated risk management are increasingly likely to fall over the coming years.;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Thomas G. Labrecque, 1998. "Risk management: one institution's experience," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 237-240.
  2. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  3. Kenneth A. Froot & Jeremy C. Stein, 1996. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Robert E. Lewis, 1998. "Capital from an insurance company perspective," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 183-186.
  5. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  6. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  7. Morris, Stephen & Shin, Hyun Song, 1999. "Risk Management with Interdependent Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 52-62, Autumn.
  8. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
  9. Michael S. Gibson, 1998. "The implications of risk management information systems for the organization of financial firms," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 632, Board of Governors of the Federal Reserve System (U.S.).
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Constanta-Nicoleta BODEA & Melania COMAN, 2009. "Competence Development in IT Projects through Education and Training Programmes," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 10(3), pages 427-435, July.
  2. Iman van Lelyveld & Arnold Schilder, 2003. "Risk in Financial Conglomerates: Management and Supervision," Finance, EconWPA 0301006, EconWPA.
  3. Daniela MATEI & Dragos CRISTEA & Alexandru CAPATINA, 2011. "Risk Management in the Age of Turbulence:Failures and Challenges," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 289-293.
  4. Victoria Geyfman, 2005. "Risk-adjusted performance measures at bank holding companies with section 20 subsidiaries," Working Papers 05-26, Federal Reserve Bank of Philadelphia.
  5. Andrew Kuritzkes & Til Schuermann & Scott M. Weiner, 2002. "Risk Measurement, Risk Management and Capital Adequacy in Financial Conglomerates," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 03-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
  7. Giorgio Stefano Bertinetti & Elisa Cavezzali & Gloria Gardenal, 2013. "The effect of the enterprise risk management implementation on the firm value of European companies," Working Papers 10, Department of Management, Università Ca' Foscari Venezia.
  8. Beverly Hirtle, 2007. "Public disclosure, risk, and performance at bank holding companies," Staff Reports 293, Federal Reserve Bank of New York.
  9. Sébastian Schich, 2005. "Diversification sectorielle : les assureurs mis au défi," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 80(3), pages 271-286.
  10. Subhani, Muhammad Imtiaz & Osman, Ms. Amber, 2011. "The Essence of Enterprise Risk Management in Today’s Business Enterprises in Developed and Developing Nations," MPRA Paper 34760, University Library of Munich, Germany.
  11. Hagigi, Moshe & Sivakumar, Kumar, 2009. "Managing diverse risks: An integrative framework," Journal of International Management, Elsevier, Elsevier, vol. 15(3), pages 286-295, September.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ris:jofitr:1274. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Springett).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.