This is the third edition of the Cass-Capco Institute Paper on Risk, a special edition of the Journal of Financial Transformation. This issue focuses predominately on the potential causes of the current crisis, the inadequacies of the current risk management models and systems, and the actions needed to prevent similar events from bringing the financial system to the brink of collapse.
The past year or so has been very bruising for executives sitting at the helms of the world's major financial institutions. Many came very close to failing, and quite a few in fact did. Many of the most respected global financial brands have now disappeared.
There have been numerous reasons put forward for the current crisis, but most have focused on the most obvious causes and not necessarily on the underlying issues that are most pertinent. The aim of this edition of the Cass-Capco Institute Paper Series on Risk is to give adequate attention to those issues that have fallen under the radar, mainly through neglect by headline-grabbing journalists or because press attention has been focused elsewhere.
The papers address the damage that securitization has caused through the disappearance of due diligence at the issuers of mortgage lending. They also examine why it is that most, if not all, of the risk measurement and management models look great on paper but are of very little value to the institutions that need them most.
This edition of the paper series highlights these issues so that actions can be taken in time for the next inevitable crisis. It insists that financial executives wake up to the fact that investing in new and more advanced models is of little benefit if they are not aware of all the risks they face. Those at the helm need to get their IT in order before any of the models can be applied. We cannot continue putting the cart before the horse.