Risk Management Failures: What are They and When do They Happen?
Charles A. Dice Center Working Paper No. 2008-18
25 Pages Posted: 6 Oct 2008
Date Written: October 2008
A large loss is not evidence of a risk management failure because a large loss can happen even if risk management is flawless. I provide a typology of risk management failures and show how various types of risk management failures occur. Because of the limitations of past data in assessing the probability and the implications of a financial crisis, I conclude that financial institutions should use scenarios for credible financial crisis threats even if they perceive the probability of such events to be extremely small.
JEL Classification: G20, G32
Suggested Citation: Suggested Citation