Financial risk governance

The financial crisis led to heated debate on how and how much to regulate the financial sector. The Risk, Policy and Vulnerability (RPV) Program in collaboration with executives from Willis Re carried out extensive interviews with insurance and bank executives, from which four different “risk cultures” were identified.

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The research calls into question whether the current approach of regulators – recommending practices aligned with one belief set, but not actually addressing alternative sets of beliefs – is likely to have the desired impact [1].

Similarly, using models in ways consistent with the different rationalities/belief sets generates different risks. This needs to be acknowledged by those who build the models and by those who use them. In alleging that modeling is a purely scientific exercise modelers create conditions of self-censorship and unaccountability. Good governance (and good science) requires transparency; multiple perspectives on risk and modeling are both unavoidable and legitimate. The authors conclude that the financial regulation debate should have more, not less, political engagement, with all the noisy and uneasy compromises that engaged dialogue involves.

References

[1] Ingram D, Underwood A, Thompson M (2014). Risk culture, neoclassical economics and enterprise risk management. Intelligent Risk, pp. 12-20 .

Collaborators

Willis Re


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Last edited: 02 April 2015

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