The challenges of risk management in diversified financial companies

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.