The Crisis Sentiment Index is a quarterly assessment of the status of the financial crisis by board members, Chief Risk Officers and other C-level executives in companies around the world. The analysis has proven quite prescient in the past. Quick snapshot of this quarter’s results: • The CSI for September 2011 has plunged 14 points to a reading of 23, the lowest reading since March of 2009 • CSI-Fear, the subindex that measures panic among professionals and the public has deteriorated by...

The Crisis Sentiment Index (CSI) is a regular assessment of the status of the financial/economic crisis around the world by senior executives and board members who are involved in risk management. Reported on a scale of 0 to 100, a reading of 75 indicates “normal conditions”. During the past quarter, negative sentiment from emerging and accelerating European sovereign risks was offset by modest improvements in credit availability and a reduction in fear, according to our survey respondents. As...

Evidence is growing that risk management adds value. Two papers that have recently been shared with me looked very specifically to answer questions about the impact of risk management programs at firms and both have found the answer to be in the affirmative. The first paper looks for evidence of an impact on firm value when Enterprise Risk Management (ERM) programs are in place. They find a positive relation between firm value and the implementation of ERM — roughly a 20% value premium...

In my recent conversations with various board members and senior risk officers, I have become more certain of the need to end the dual and conflicting roles assigned to the newly emerged Chief Risk Officer. It is not reasonable to expect a company to make its most effective use of risk capital when its best resource for such is also expected to act as a watchdog. While such an arrangement helps to deal with the Board/CEO agency problem, it simultaneously under-serves shareholders by diverting...

In past posts I’ve talked about various elements of psychology, behavioral finance and complexity as they can be applied to risk management and our organizations. Risk is the change in value of a system or “thing”. Value can go up or down. A risk event is the event that drives that change in value. Risk management, then, is the process of shaping how the system or “thing” changes in value in response to a risk event, but in a manner more to your liking. Much of the...

This blog is focused on integration of risk management into the business process. To highlight different ways in which this can happen, I try to find angles that we typically don’t consider as risk managers. This week, I was introduced to an amazing integration of risk management into a “business”. The associated output is visual, realized through a combination of the “CEO’s” creativity and the way in which the company’s risk manager’s work fits...

This week, the Financial Times asked at the end of their Tuesday opinion piece whether some elements of Basel II that are contributing to pro-cyclicality of the credit cycle and elements of fair-value accounting should temporarily be suspended. Today it was reported that the Financial Services Authority (FSA) in the UK has held ’round table’ meetings with banks and leading auditors to discuss fair value accounting as part of its analysis of valuation techniques in the current market...

This week, Fed Governor Randall Kroszner called on the financial sector to develop industry-wide guidelines for compensation that would better align individual incentives with the long-term interests of the firms they work for (see article). “Aligning Compensation Systems with Risk Management Objectives” is a chapter that I wrote in 2006 for Michael Ong’s book Risk Management: A Modern Perspective. Click on the link to download the chapter in PDF format. I also have a brief...

At the recent PRMIA Credit Forum in New York, one slide from an early morning presentation leaped off of the screen. The slide depicted the number of issuers coming to the marketplace at below investment grade. In 2000, less than 100 Single-B issuers came to market. In 2007, that number had grown to nearly 250. In 2000, slightly more than half of the issuers were below investment grade. By 2007, the figure was 82%. At the same time, the number of issuers who were able to come to market...

While Basel II is generally seen by industry practitioners as having been a positive contributor to the risk management of banks and the stabilty of financial systems (see PRMIA Survey), the nagging worry that most have had is that the use of market-sensitive credit models would lead to an exacerbation of credit cycles. This may be coming to fruition in terms of credit restrictions and some would argue that this is just the flip-side of the easy credit terms the same models allowed when...