Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

1.1 Contrasting Risk Management and Risk Measurement

The distinction I draw between risk management and risk measurement argues for a subtle but important change in focus from the standard risk management approach: a focus on understanding and managing risk in addition to the independent measurement of risk. The term risk management, unfortunately, has been appropriated to describe what should be termed risk measurement: the measuring and quantifying of risk. Risk measurement requires specialized expertise and should generally be organized into a department separate from the main risk-taking units within the organization. Managing risk, in contrast, must be treated as a core competence of a financial firm and of those charged with managing the firm. Appropriating the term risk management in this way can mislead one to think that the risk takers' responsibility to manage risk is somehow lessened, diluting their responsibility to make the decisions necessary to effectively manage risk. Managers cannot delegate their responsibilities to manage risk, and there should no more be a separate risk management department than there should be a separate profit management department.

The standard view posits risk management as a separate discipline and an independent department. I argue that risk measurement indeed requires technical skills and often should exist as a separate department. The risk measurement department should support line managers by measuring and assessing risk—in a manner ...