SOURCE: Capco

Capco

April 19, 2010 00:01 ET

Inadequate Risk Management Models Continue to Expose the Global Financial System to Great Risks, According to The Capco Institute's Journal of Financial Transformation

World's Top Business and Academic Leaders Will Convene in London to Debate Solutions at Third Annual Cass-Capco Conference on Risk

NEW YORK, NY and LONDON--(Marketwire - April 19, 2010) -  Despite the recent financial crisis, banks and financial organizations continue to use outdated or flawed business models, creating significant, ongoing risk within the global financial system, according to the latest issue of The Capco Institute's Journal of Financial Transformation. The Journal finds that the gap between finance theory and practice remains well intact, with many banks and financial organizations continuing to rely heavily on risk management quantitative models and formulas that failed -- in some cases repeatedly -- during the market turbulence of the past several years. 

The Journal of Financial Transformation is the only professionally focused scientific journal in finance to be accredited by the American Economic Association and among the 20 journals recommended by the European Finance Association. It has received the APEX Award for Publication Excellence every year since 2002 and has had contributions from 20 Nobel Laureates. The Capco Institute, which publishes the Journal, is ranked among the world's foremost think-tanks by the Social Science Research Network.

Among the Journal's key findings:

  • Risk Models: Current quantitative risk management models simply do not work in practice;
  • IT & Risk: Financial institutions need to sort out their operations and IT before they can manage risk effectively;
  • Value at Risk (VaR): "To see the problems of using VaR one need only to look at the performance of hedge funds and statistical arbitrage traders during the summer of 2007. Many funds lost 20% of their capital in those months alone." [Capital at Risk - A More Consistent and Intuitive Measure of Risk; David J. Cohen & David Abuaf];
  • Derivatives: George Soros, the renowned financier, avoided derivatives "because we don't really understand how they work"; Felix G. Rohatyn, the prominent investment banker, called derivatives "potential hydrogen bombs"' and Warren E. Buffett remarked that derivatives were "financial weapons of mass destruction." Greenspan, on the other hand, felt that "derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing and capable of doing so." [Lessons from the Global Financial Meltdown of 2008; Hershey H. Friedman & Linda W. Friedman]

To debate viable solutions to improve financial institutions' risk management, leading business and academic leaders from around the world will convene on April 19, 2010 at the Third Annual Cass Business School-Capco Conference on Risk in London. Speakers participating in the Conference will address several key issues related to Risk:

  • John Kay, author, economist and Keynote Speaker ("Obliquity");
  • Andrew Procter, Global Head of Compliance at Deutsche bank AG ("Operational Risk");
  • David Jessop, Global Head of Equities Quantitative Research at UBS ("Future of Risk"); and
  • Nicholas Child, Head of EMEA Markets Compliance at Citi ("Compliance")

"Our financial system came very close to collapsing, and had it not been for the aggressive and immediate responses from global monetary authorities, many more financial institutions might have buckled under -- with dire consequences for the global economy and consumers," said Rob Heyvaert, Founder and CEO of Capco. "The latest issue of The Capco Institute's Journal of Financial Transformation identifies many of the significant risks that continue to pose a threat to the industry. The Cass-Capco Conference on Risk will bring together leading financial experts from around the world to discuss and debate the steps needed to modify these risks and and maximise the likelihood of the global financial system recovering sustainably."

Capco is a global provider of consulting and managed services to the financial services industry. Cass is the largest provider in Europe of specialist masters courses geared towards the global financial services industry.

"The Journal's latest issue focuses on the lack of due diligence that damaged our financial system," said Professor Shahin Shojai, Global Head of Strategic Research at Capco and editor of the Journal of Financial Transformation. "The authors, who include leading industry, academic and policy experts, offer significant insights on how the industry can improve risk measurement models that can -- and should -- be embraced by financial institutions across the globe."

Richard Gillingwater, Dean of Cass, said: "As a major business school specializing in finance and the financial sector, risk and a proper assessment of it is at the heart of much of what we research and teach at Cass. This event brings together risk experts from both academia and industry to determine how financial institutions should learn from and respond to the recent crisis." 

The Journal's current issue, available at www.capco.com, features several articles on risk management by notable experts including:

  • Hans J. Blommestein, head of Bond Markets and Public Debt, OECD
     ("Risk Management after the Great Crash")

  • Rodney Coleman, Department of Mathematics, Imperial College London
     ("A VaR too Far? The Pricing of Operational Risk")

  • Jennifer Bender, vice president, MSCI Barra & Frank Nielsen, executive director, MSCI Barra 
    ("Best Practices for Investment Risk Management")

  • Sandeep Vishnu, Partner, Capco
     ("Enterprise Friction: The Mandate for Risk Management")

  • Alicia Novoa, economist, Financial Oversight Division, IMF & Jodi Scarlata, deputy division chief, Financial Analysis Division, IMF & Juan Solé, economist, Global Financial Stability Division, IMF
    ("Financial Stability, Fair Value Accounting, and Procyclicality")

About Capco
Capco is a leading global provider of integrated consulting, technology and transformation services dedicated solely to the financial services industry. Our professionals combine innovative thinking with our unrivalled first-hand industry knowledge to offer our clients consulting expertise, complex technology and package integration, and managed services to move their organizations forward. Through our collaborative and efficient approach, we help our clients successfully increase revenue, manage risk and regulatory change, reduce costs and enhance control. In North America, we specialize in Banking; Capital Markets; Wealth and Investment Management; Finance, Risk & Compliance and Technology with offices in Chicago, D.C., New York, San Francisco and Toronto. To learn more, contact us at + 1 212-284-8600 (+32 3 740 10 00 from outside the United States or Canada), or visit our Web site at www.capco.com.

About The Cass Business School
Cass Business School, City University, London, delivers innovative, relevant and forward-looking education, training, consultancy and research. Located in the heart of one of the world's leading financial centers, Cass is the business school for the City of London. Cass has the largest faculties of Finance and Actuarial Science and Insurance in Europe. It is ranked in the top 10 UK business schools for business, management and finance research and 90% of the research output is internationally significant. Cass is a place where students, academics, industry experts, business leaders and policy makers can enrich each other's thinking. For further information, visit www.Cass.city.ac.uk.

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