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

3.2 Manage Infrastructure—Process, Technology, Data

Process and procedure, and the whole arena of operational process and controls, are critically important. These aspects of management are also vastly underappreciated. Many financial disasters—from large and world-renowned ones such as Barings Bank's collapse of 1995 to unpublicized misfortunes on individual trading desks—are the result of simple operational problems or oversights rather than complex risk management failures. To coin a phrase, processes and procedures are not rocket science; nonetheless, losses in this arena hurt as much as any others, possibly more so because they are so easy to prevent and are so obvious after the fact. From Lleo (2009):

Jorion (2007) drew the following key lesson from financial disasters: Although a single source of risk may create large losses, it is not generally enough to result in an actual disaster. For such an event to occur, several types of risks usually need to interact. Most importantly, the lack of appropriate controls appears to be a determining contributor. Although inadequate controls do not trigger the actual financial loss, they allow the organization to take more risk than necessary and also provide enough time for extreme losses to accumulate. (p. 5)

Technology and Data

Risk management and risk measurement projects are as much about boring data and information technology (IT) infrastructure as about fancy quantitative techniques; after all, if you do not know what you own, ...