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Types of Risk Management Failures

  • Risk metrics failure. Example: MG and LTCM
  • Incorrect measurement of known risks. Example: MRM and LTCM
  • Ineffective risk monitoring. Example: Barring’s and Sumitomo
  • Ineffective risk communication
  • Ignorance of significant known risks. Example: MG and LTCM
  • Unknown risk


Role of risk metrics

  • Risk Metrics like VaR, help measure and quantify risk and help managers to take decisions in line with the targeted risk measures
  • Problems with VaR:
    • Frequency of Reporting: Daily losses below VaR, but accumulating on an annual basis
    • Does not capture extremely large losses which have a very low probability of occurrence
    • VaR assumes distribution of losses is not correlated. Correlation among various variables increases in times of crisis


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