The Nature of Risk

Chit chatting with one of the technical analysts in Causal Capital just yesterday brought forward some curious ponderings on the different disciplines of risk management.

It would be fair to say that the difficulties of measuring Market Risk lie beyond the realm of data and are deeply entrapped in contracts and models. Separately, anyone who works with operational risk should realise relatively quickly that data is a challenge and it follows; if Operational Risk can become as resplendent with time series data as Market Risk is, managing it would be an entirely different experience. Maybe a winning goal for operational risk is to establish infrastructure to allow it to be monitored through a continuous signal of Key Risk Indicators and in a similar way to market risk.

Those risk managers that have been lucky enough to work with more than one risk discipline will know what I am driving at here, and there is wonderful learning to be found by seeing what other risk analysts do in adjacent fields of study.

The Nature of Risk | Martin Davies [LINK]

Nonetheless, it is curious to assess these three risk disciplines against a set of criteria (shown to the left on the diagram) and in doing so, a few insights and realisations become apparent. Perhaps the most concerning is that Enterprise Risk Managers have an incredible task in front of them and when one considers the nature of each risk area, it becomes clear that you can't directly treat market risk as if it is an operational risk ... why would you want to do that is a better question to answer, just as we have shown above. We also need to accept the idea of risk silos is probably a necessary structure to uphold but the real value of enterprise risk management comes in bridging the gaps between these risk management silos.

If you are a risk manager, I would be curious to hear about your thoughts on measuring these different areas of risks. What are your challenges and how are you addressing them?