New Guiding Principles: Macroprudential Solutions to Risk Management Oversight and Systemic Risk Concerns
41 Pages Posted: 14 Sep 2015 Last revised: 18 Sep 2015
Date Written: September 1, 2015
The financial crisis of 2008 revealed massive failures in risk management throughout the financial sector. Congress and federal regulators responded to these manifest failures with initiatives to reconstruct risk management structures within large financial institutions and public firms. Nevertheless, these initiatives rely upon proper corporate governance frameworks creating proper incentives for senior managers and directors to attend to risk management. As such, these initiatives are unlikely to succeed and expose our economy to continued macroprudential risks and resulting financial instability. In sum, these corporate governance-oriented reforms are too weak to stem the tidal wave of enterprise risk and systemic risk that risk management failures at financial firms engender. Continued reliance on these types of reforms is not inherently problematic. The failure to recognize the limits of this approach, however, may well lead to even more devastating risk management failures, market disruptions, and the realization of irreversible systemic risks.
Keywords: ERM, Risk Management, Dodd-Frank, Enhanced Prudential Regulation, Financial Crisis
JEL Classification: B1, E6
Suggested Citation: Suggested Citation