Implementing Enterprise Risk Management

CHAPTER 2Key Trends and Developments

INTRODUCTION

The world of risk management fundamentally changed in late 2007 with the onset of the global financial crisis. Longstanding financial institutions such as Lehman Brothers and Washington Mutual were left to fail, while many other banks and non-banks received bailouts from nervous national governments around the world. It was clear that excessive debt and fatally compounded risks were the primary drivers of the crisis. What's more, a relatively strong global economy had disguised the fact that many institutions were betting on unsustainable levels of growth in pursuit of greater market share and increased profitability. In this chapter, we'll review the lessons learned from the financial crisis and other corporate disasters, and how the practice of enterprise risk management has fundamentally changed.

LESSONS LEARNED FROM THE FINANCIAL CRISIS

The economic landscape that emerged following the Great Recession was vastly different from what existed prior to the 2007–2008 period. Regulators demanded that banking institutions increase capital and liquidity reserves, enhance transparency, curb risk appetite, and tighten controls. This had positive as well as negative effects. On the positive side, the regulations provided a basis for forward-looking analysis such as stress testing and scenario modeling. On the downside, however, many companies failed to take these hard-won lessons to heart, focusing exclusively on meeting regulatory ...