The old world challenge of focusing on risk to activities could prevent your organisation from successful realisation of its corporate strategy in the new world challenges. The recent shock of foreign movements impacts your company’s financial risk and the business risk – your ability to compete effectively. The effect of the economic exposure on the long term competitiveness of the company needs to be managed for the long-term survival of a company.


It becomes essential to protect your financial and business risks. By identifying and minimising foreign currency risk; managing the quantity and extent of impact; reducing the exposures with hedging decisions; and providing a common way of looking at foreign currency risk impact on an enterprise-wide basis enhances the delivery of effective decisions.

Before the onset of turbulence , the management had established rigorous internal processes requiring critical judgment and discipline in the valuation of holdings of complex or potentially illiquid securities. These firms were skeptical of ratings agencies' assessments of complex structured credit securities and consequently had developed in-house expertise to conduct independent assessments of the credit quality of assets underlying the complex securities to help value their exposures appropriately.  Subsequent to the onset of the turmoil, these firms were also more likely to test their valuation estimates by selling a small percentage of relevant assets to observe a price or by looking for other clues, such as disputes over the value of collateral, to assess the accuracy of their valuations of the same or similar assets.

In contrast, those firms that generally lacked relevant internal valuation models and sometimes relied to passively on external views of credit risk from rating agencies and pricing services to determine values for their exposures suffered very badly in their earnings. Given that the firms surveyed for this review are major participants in credit markets, some firms' dependence on external assessments such as rating agencies' views of the risk inherent in these securities contrasts with more sophisticated internal processes they already maintain to assess credit risk in other business lines. Furthermore, when considering how the value of their exposures would behave in the future, they often continued to rely on estimates of asset correlation that reflected more favorable market conditions. In other words, all of these firms had sophisticated analytical capabilities, but only some actually chose to use them. Others didn't bother, preferring to rely on third-parties (like ratings agencies) and optimistic assumptions until it was too late.

An overarching difference is apparent in the balance that senior management achieved between expanding the firms' exposures in what turned out to be high-risk activities and fostering an appropriate risk management culture to administer those activities. [...] For example, firms that experienced material unexpected losses in relevant business lines typically appeared to have been under pressure over the short term either to expand the business aggressively, to a point beyond the capacity of the relevant control infrastructure, or to defend a market leadership position. In some cases, concerns about the firms reputation in the marketplace may have motivated aggressive managerial decisions in the months prior to the turmoil. [...]

[S]enior management at ... firms that recorded relatively large unexpected losses tended to champion the expansion of risk without commensurate focus on controls across the organization or at the business-line level. At these firms, senior management's drive to generate earnings was not accompanied by clear guidance on the tolerance for expanding exposures to risk. For example, balance sheet limits may have been freely exceeded rather than serving as a constraint to business lines. The focus on growth without an appropriate focus on controls resulted in a substantial accumulation of assets and contingent liquidity risk that was not well recognized.

So it wasn't just fecklessness that led firms to over-rely on ratings agencies, etc. It was a conscious decision at the executive level to ignore risk and pursue short-term profits.

A second difference noted by our supervisory group concerns the role that firms' senior managers (including its chief executive officer, chief risk officer, and others) played in understanding the emerging risks and acting on that understanding to mitigate excessive risks.

The senior management teams at some of the firms that felt most comfortable with the risks they faced and that generally avoided significant unexpected losses ... had prior experience in capital markets. Consequently, the nature of market-related events over the summer of 2007 played to their experience and strength in assessing and responding to rapidly changing market developments and issues such as uncertainty in valuations. As risk issues were identified and brought to the attention of senior managers, executives in many of the firms that avoided significant losses championed robust and timely risk mitigation efforts, including executing hedges, deciding to write down exposures, and enhancing management information systems.

In contrast, some of the executive leaders at firms that recorded larger losses ... did not have the same degree of experience in capital markets and did not advocate quick, strong, and disciplined responses.

This is about as close as a multi-national panel of financial regulators will ever get to saying, "Bumbling rubes somehow got control of major banks...and lost billions!"

But the bottom line isn't simply that bumbling rubes lost billions; it is that some but not all of these institutions were mis-managed in this fashion. That is, there was nothing "inevitable" about the chain of events leading to the sub-prime meltdown, and the risks really were apparent to those who cared to look for them.