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David R. Koenig wrote a new blog post titled Qualified Risk Director Guidelines Released for Better Oversight of Risk by Boards of Directors
The Directors and Chief Risk Officers group (“the DCRO”) today issued its guidance to organizations seeking to better govern risk through the identification and recruitment of Qualified Risk Directors to their boards of directors and risk committees of the board. In the spirit of the Audit Committee Financial Expert, where specific board members are designated as experts in the analysis of financial statements and control processes, the QualifiedRisk Director guidelines were developed by an international group of active board directors and chief risk off… to assist organizations in...
2292 days ago
David R. Koenig wrote a new blog post titled Crisis Sentiment Index Improves by 5 Points in December; Still More than 40 Points Away from Normal Conditions, But Some Positive Signs Emerging
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 governance. Reported on a scale of 0 to 100, a reading of 75 indicates “normal conditions.” For December 2012, the Crisis Sentiment Index (CSI) improved five points to a reading of 34. This is approximately the same level at which the index stood in June 2009. At the same time is also the second highest reading since June 2011. Overall sentiment remains very cautious, but the first hints of some optimism were...
2445 days ago
David R. Koenig wrote a new blog post titled Congress is Broken – Does the Solution Come from Random Numbers?
As the 2012 elections approached, the approval rating of the U.S. Congress was somewhere between 10% and 20%. Yet, despite this, more than 90% of candidates for the U.S. House of Representatives that sought re-election, won. It’s not a secret that this paradoxical incongruity is a problem that threatens the credibility of our system of government. The result is not random, but the solution might be. Every ten years, following the U.S. Census, the maps of districts that our representatives represent are re-drawn. While state laws on how this redistricting is achieved vary wildly, some...
2445 days ago
David R. Koenig wrote a new blog post titled Crisis Sentiment Index Worst Since March 2009, Fear at Highest Level Since Survey Began
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 21 points to a reading of 12, five points below the worst reading since we began the survey in...
2916 days ago
David R. Koenig wrote a new blog post titled Crisis Sentiment Index Rises Two Points in December
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 a result the Crisis Sentiment Index (CSI) for December 2010 rose two points to a reading of 39. At...
3004 days ago
David R. Koenig wrote a new blog post titled Evidence that Risk Management Adds Value
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 — which is statistically and economically significant The second paper, which Jean Hinrichs...
3004 days ago
David R. Koenig wrote a new blog post titled Divide and Conquer
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 the attention of those who best understand risk from advising on how to best use it. In the emerging...
3004 days ago
David R. Koenig wrote a new blog post titled Books to Help With Understanding the Crisis and to Make Things Better
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 success of risk management depends on how people perceive things, whether it be their worth today,...
3004 days ago
David R. Koenig wrote a new blog post titled Integrated Risk Management – A Spectacular Video
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 seemlessly into the production. The 10-minute video (see link below), is not like anything you might...
3004 days ago
David R. Koenig wrote a new blog post titled Survey Results: Is Fair-Value Accounting Exacerbating the Credit Contraction?
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 turmoil. Last week we invited a group of professionals involved in risk management to share their...
3004 days ago
David R. Koenig wrote a new blog post titled Chapter 31 – Aligning Compensation Systems with Risk Management Objectives
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 article on “Generalized Problems with Metric-Based Incentive Plans” which you can download...
3004 days ago
David R. Koenig wrote a new blog post titled Blame the Pension Fund “Animals” for Excessive Risk-Taking Behavior?
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 increased by 56 percent. Said another presenter, “10 years ago, most of these firms could never...
3004 days ago
David R. Koenig wrote a new blog post titled Pro-cyclicality (the flip side)
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 volatility was low and stock prices were increasing. As the Bloomberg headlines says today MBIA, Ambac...
3004 days ago
David R. Koenig wrote a new blog post titled Call for Papers: The Blind Spots of Risk Management
The Blind Spots of Risk Management – A Special Issue of the Journal of Risk Management in Financial Institutions Over the past 20 years, the field of financial risk management has grown and advanced at an incredible pace. Oftentimes, an industry or profession that experiences this degree of expansion doesn’t have time to reflect on whether the paths it has taken are truly the best paths or whether key elements or key assumptions are relied upon inappropriately or disproportionately to their true value. An insularity or self-assuredness may prevent us from examining other sectors...
3004 days ago