Alignment of business strategy and risk appetite should minimize the firm's exposure to large and unexpected losses. In addition, the firm's risk management capabilities need to be commensurate with the risks it expects to take.
A bank needs models to measure risk. The problem, however, is that any one bank can measure its risk, but it also has to know what the risk taken by other banks in the system happens to be at any particular moment.
At Berkshire, I both initiate and monitor every derivatives contract on our books ... If Berkshire ever gets in trouble, it will be my fault. It will not be because of the misjudgments made by a risk committee or chief risk officer.
Our risk systems and processes - we keep investing and improving them.
What the banking system needs is creditors who monitor risk and cut their exposure when that risk is too high. Unlike regulators, creditors and counterparties know the details of a deal and have their own money on the line.
Keeping the risk management plan up to date can transform it from a door stop into a vital project management tool. Remember: what you don't know can kill your project.
Risk management systems and controls may discourage or limit certain revenue-generating opportunities. Failure to ensure the independence of these functions from the revenue generators and risk takers has been shown to be dangerous, and this is something for which the board is accountable.
A system, artificially stabilized, and of course you have hidden risks under the surface, and you don't know where the risks are.
