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

Chapter 1

Risk Management versus Risk Measurement

Managing risk is at the core of managing any financial organization. This statement may seem obvious, even trivial, but remember that the risk management department is usually separate from trading management or line management. Words matter, and using the term risk management for a group that does not actually manage anything leads to the notion that managing risk is somehow different from managing other affairs within the firm. Indeed, a director at a large financial group was quoted in the Financial Times as saying that “A board can't be a risk manager.”¹ In reality, the board has the same responsibility to understand and monitor the firm's risk as it has to understand and monitor the firm's profit or financial position.

To repeat, managing risk is at the core of managing any financial organization; it is too important a responsibility for a firm's managers to delegate. Managing risk is about making the tactical and strategic decisions to control those risks that should be controlled and to exploit those opportunities that can be exploited. Although managing risk does involve those quantitative tools and activities generally covered in a risk management textbook, in reality, risk management is as much the art of managing people, processes, and institutions as it is the science of measuring and quantifying risk. In fact, one of the central arguments of this book is that risk management is not the same as risk measurement. In ...