Friday, October 24, 2008

Risk Management in the Age of Structured Products

(Deloitte Center for Banking Solutions) While it is tempting to lay blame on the structured credit products themselves, the causes of the current economic environment appear to be much more far-reaching. According to our new report, “Risk Management in the Age of Structured Products,” key underlying issues in the recent credit crisis include:
  • Prolonged maintenance of low short-term interest rates
  • Resulting housing price bubble and subsequent bust
  • Modified approaches to underwriting and a reduced emphasis on traditional underwriting standards
  • High levels of leverage in many areas of the financial system
  • Valuation and risk measurement analytics that did not fully keep pace with product complexity
  • Questions about risk management effectiveness

This is not the first time the financial services industry has experienced a downturn that could be traced to such issues. What makes this market collapse different is the magnitude of the losses and the number of firms that seemingly did not fully understand their aggregate risk exposures.

We believe it is time to take a fresh look at the risk management capabilities of financial institutions. A change in the way methodologies and processes are executed can help many financial institutions move from a position of vulnerability to a place where risk management is executed more holistically, and the company is not exposed to material unknown risks. Visit Deloitte.com to access the full report, part of the Deloitte Center for Banking SolutionsShaping the New Financial Services Marketplace series.

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