Perhaps, nothing. All living things have perpetually lived alongside the full and growing family of risk. From the dark ages to the currently more knowledgeable surroundings, mankind has fairly well protected itself from all types and formats of risk. Every possible danger or even the possibility of the danger likely to emerge has been adequately documented; following which the human brain found numerous alternatives and solutions, to either prevent its occurrence or to at least de-fang it, of its potential to hurt or damage. The study of climate and its pattern has helped man to save himself from the attack of natural disasters. Today, with near to accuracy, climate forecasts continue to help mankind prepare for droughts, thunderstorms, torrential rain, cyclones, tornadoes, etc. Hence, the existence of risk and its related management is nothing new; what's new is the mushrooming of newer types of risk that emanates from advancements in science and technology. For these too, there is a continuum of research and development, to counter the perils of the associated risk.
Have any wondered why the emperors, kings, princes and nobility, invariably always sported a beard? They did not wish to shave each day. Why? Because the risk of having a stranger holding a sharp edged razor flirting nearest to the jugular vein, was prone to unimaginable risks. Palace intrigues — by politicians, to get the favours of the heir- apparent, could easily bribe the barber to do the needful of dispatching the ruler to the eternal world; hence, it was considered safest to let the beard grow. But then it needed overtime, some gardening of sorts, to smoothen out the growth or to give it a shape or trim --- risk had to be taken. When any king, ruler or queen, would go under the razor of the security cleared barber, there would stand in attendance four armed loyalist guards, with glistening and sharp edged swords - to behead instantly the barber, should he/she would want to venture and do the bidding against a promise of future, “closeness” to the new king -- no life, no gain, the barber would know very well. The risk of being razored to death was met with the mitigant of a life threatening sharp naked blade of the sword - that would always be yearing with delight for it to be used effectively!
Abbas Ibne Firnass, wanted to fly like a bird - he made wings that he attached to his shoulders and then went to the highest cliff and flew off it- only to land, with the large flap of wings embracing his corpse - lifeless obviously, as a shroud for adventurism. He failed to do a proper risk assessment. The first of which should have been, what if the wings didn't hold against the strong wind currents; and secondly he wrongly chose not to jump off a cliff overlooking the ocean!
The Wright brothers courageously, after many failed attempts, flew finally in a motorised aircraft - with controls in their hand - only mechanical controls! The possible failure of the machine or even its slightest lack of cooperation in obeying the command of the cockpit, were either not measured as a major risk or were just brushed under the ballooning spirit of adventurism.
With time, when flying became popular as a means of transportation and accompanied by advancements in science and technology - some wise-acre decided to build a ‘parachute’. The Wright brothers were possibly full of faith in their machines, but the subsequent risk managers thought it best to have on board, not only a parachute for each passenger, but also a life-saving jacket, to mitigate against the risk of hitting the sea. The use of parachutes in today's commercial airlines is not in vogue, but it comes in very handy to the pilot of a fighter jet aircraft, when at the first sign of danger, he decides to hit the eject button.
Jean-Jacques Rousseau wrote: “Every man has a right to risk his own life in order to preserve it. Has it ever been said that a man who throws himself out the window to escape fire is guilty of suicide”. It is however expected of the human mind to exercise discretion between what is safe to do and what is dangerous to indulge in.
In the financial world, risk management began after World War-II. Initially it was within the domain of the insurance industry where they would use various risk tools to determine how many insurance cover would have to be honored, if the risk were to take a practical shape - example life expediency. Risk parameterisation later caught up to be an integral ingredient of the entire financial industry’s ecosystem, inclusive of its related financial instruments.
Bankers in particular who bask with pride in the ‘glory of risk management’ are the ones who, despite availability of risk assessment tools, lose their depositor’s money with impunity. Even the borrower doesn't know, what the lending banker knows - barring industry specific agencies, all bankers know that loans do not get bad -- but bad loans are doled out.
We can endlessly draw mathematical modeling of risk, in all it's perceivable connotations, but nothing can prevent the occurrence of any specific risk, nor does it help once the event has happened.
At an institution, the risk management group had very methodically designed the ‘response guidelines’ to the risk of fire at the workplace. This document went through various stages of scrutiny and approval, following which it was disseminated through the rank and file of the entity. And unfortunately to the chagrin of the institution, an electrical short circuit caused a fire --- everyone on that floor ran helter-skelter - The “Risk Manager” who according to rule book was required to surprise the evacuation process, was locked up in his cabin, on another floor, in an ----, where he was ---- preparing an email for the benefit of the senior management, informing them about the fire! During this time, through sheer voluntary display of heroics by a few, many lives were saved - no casualties; however - the risk management manual continues to sit upon the shelves of the middle and senior management!
The hair splitting of risk, any risk, is actually nauseating - the practitioners go to the extent of again creating mathematical models of credit extension and subsequent repayment -- the probability of default is worked out in numbers. Yet, look at the portfolio of stressed assets of the financial institutions.
Risk management technique cannot alter human instinct and behavior- it is the mental makeup of the borrower that will indicate the probability of default - and like all aspects that reside in the realm of the non-quantifiable, human behavior too cannot be confined to a definitive algorithmic equation or geometric theorem, with a QED! Each individual is unique and different. Who will pity a snake charmer bitten by a serpent or any who goes near wild beasts? As the saying goes: give me the man, and I will give the law.
Risk sweetens life and living. Risk and creativity grow on the same stalk. It is best to remember that, whatever is not wisdom is a risk. Risk management technique cannot be the final say in the determination of risk; many risk managers at best will estimate for you, if you were to forget your telephone numbers. Those who play with the paws of a lion, must be prepared for it (lion) to make a decent meal out of such.
The best of practices enshrined in the manuals of risk management are not good enough to stop the occurrence of an event, like say, the subprime crisis of 2009 and onwards.
The best in class risk management structure of an international investment bank couldn't prevent or even discover in good time, the Yen denominated options of the Nikkei index positions taken by a single trader in Singapore.
Essentially it boils down to is the ‘conduct risk’, if one can call it a risk - the training, aptitude and mental makeup of people whose job is to foresee and protect from the rot of all types. More on conduct risk in later columns (God willing).
The writer is a senior banker and freelance columnist