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The challenges of risk management in diversified financial companies

  • Christine M. Cumming
  • Beverly Hirtle

In recent years, financial institutions and their supervisors have placed increased emphasis on the importance of measuring and managing risk on a firmwide basis—a coordinated process referred to as consolidated risk management. Although the benefits of this type of risk management are widely acknowledged, few if any financial firms have fully developed systems in place today, suggesting that significant obstacles have led them to manage risk in a more segmented fashion. In this article, the authors examine the economic rationale behind consolidated risk management. Their goal is to detail some of the key issues that supervisors and practitioners have confronted in assessing and developing consolidated risk management systems. In doing so, the authors clarify why implementing consolidated risk management involves significant conceptual and practical difficulties. They also suggest areas in which additional research could help resolve some of these difficulties.

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Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2001)
Issue (Month): Mar ()
Pages: 1-17

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Handle: RePEc:fip:fednep:y:2001:i:mar:p:1-17:n:v.7no.1
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  1. Michael S. Gibson, 1998. "The implications of risk management information systems for the organization of financial firms," International Finance Discussion Papers 632, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. 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.
  4. 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 96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. Thomas G. Labrecque, 1998. "Risk management: one institution's experience," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 237-240.
  6. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  7. 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.
  8. 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.
  9. Robert E. Lewis, 1998. "Capital from an insurance company perspective," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 183-186.
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