Canary in a Coal Mine
October 31, 2008 Leave a comment
During the recent boom in mortgage-backed securities and credit derivatives, many risk managers were hired to serve as the “canary in a coal mine” for financial institutions. In the past, coal miners would bring a canary with them to work to ensure that they did not die as a result of carbon monoxide poisoning. If the canary stopped singing and died, then the coal miners knew to evacuate due to the risk of high levels of carbon monoxide gas in the mine. The problem with the financial institutions was that the canary (i.e. risk manager) stopped singing in many cases. The miners (i.e. bankers) chose not to pay attention to the canary at their own peril.
Just this week, the following was published in US Banker magazine.
“There’s a lot of finger pointing going around about what led to the current financial market breakdown, but perhaps the most ridiculous target of blame is the very idea of financial derivatives, as if these products sprang out of the ground like a particularly potent crop of poison ivy while no one was looking. In reality, a lot of people were looking, and a fair number of risk managers were warning, but too many institutions were either ignoring or mis-measuring the risk.”
Rather than solely rely in the future on sophisticated models, the magazine suggests that many financial institutions are getting back to basics. Edward Hida, a risk management expert from Deloitte, is quoted by the magazine as saying that it all begins with:
“a strengthening of governance and monitoring. The chief risk officer “should serve as a central point. Risk management should be a robust process across functions.”
He makes a great point, but the rest of the organization must heed the warnings of the chief risk officer in the future or suffer the same fate as the poor souls at the bottom of the mine.