– Thoughts on Strategy and Management

Financial crisis 2.0

The financial turmoil 2007 – 2009 represented an excellent opportunity to review and to improve regulatory requirements because the industries’ readiness to adapt and change has increased during the crisis. The first crisis has put an emphasis regarding specific gaps in how banks identify, assess, control and report risks.

Today we have to answer the question whether (at all) and to what extent this opportunity has been exploited. VENKATRAMAN and MADASU (2009) argue that parts of the risks management systems and approaches in some banks were more on paper than in practice. The challenge in the next few years (still!) is to identify the right course for the long term in terms of greater transparency, effective regulation and appropriate tolerance for business growth. The general risk was that under the impression of the first turmoil, the primary focus is on trying to reduce the particular weaknesses only which caused the specific failures at hand. 3 years later we have to conclude that some major players in the market (i.e. SOG, UBS) did not make their homework. Even a triple A rating has a small default risk, but definitely not zero. Furthermore banks have to address the question whether they should rely their investment decisions on a rating only (compare S&P “Are Credit Ratings indicators of investment merit?“…..
In evaluating an investment, investors should consider, in addition to credit quality, the current make-up of their portfolios, their investment strategy and time horizon, their tolerance for risk, and an estimation of the security’s relative value in comparison to other securities they might choose.”)

Financial service organizations that focus on long term and sustainable success require an operating environment with regulatory conditions which support two objectives simultaneously: They offer a protection against turmoil and also support the efficiency of the sector by an appropriate combination of stability, a level playing field, and the possibility to perform. Furthermore it is essential that all regulatory bodies have the organizational resources to monitor a sound application of regulatory requirements and to identify malpractice of regulatory gaps. This in sum can be the best means of preventing crisis.

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