Systemic Operational Risk: People Risk in the Global Financial Crisis
Journal of Operational Risk, Volume 6/Number 3, Fall 2011
Posted: 2 Oct 2017
Date Written: September 10, 2011
It is generally considered that the GFC was triggered, at least in part, by failures in markets trading in complex securities based upon so-called 'subprime' mortgages. While subprime mortgages carry greater credit risk than 'prime' mortgages, the processes used to securitize these mortgages were based upon the well-established 'Asset Based Securitization' model. The question raised is why securitization of these particular mortgages caused such chaos in markets around the world?
The Chairman of a US Senate Subcommittee investigating the causes of the GFC summarized their findings thus "Running through our findings and these hearings is a thread that connects the reckless actions of mortgage brokers… with market-driven credit rating agencies and the Wall Street executives designing the next synthetic. That thread is unbridled greed, and the absence of a cop on the beat to control it."
Recklessness and greed are People-related issues that appeared to be present throughout the Securitization system.
This paper argues that the vast losses incurred during the GFC were, in part, precipitated by Systemic Operational Risk, in particular, People-related Risks.
Using examples from documented cases, the paper identifies some of the People Risks that went unidentified and unmanaged within the Securitization system, until the market seized up. The paper then suggests approaches to addressing the increased People Risks that caused problems throughout the Securitization system to go unnoticed.
Keywords: People Risk, Operational Risk, Basel II, Systemic Risk, Securitization, Global Financial Crisis, Financial Crisis Inquiry Commission
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