NEW YORK (TheStreet) -- Thanks to the latest JPMorgan Chase (JPM) "$2 Billion dollar oops," the risk world has been rocked. When the biggest, baddest bank-on-steroids and really smart folks in risk management screw up, GRC models are at risk.
You have to say, "Is governance too hard to govern, risk too hard to manage, and compliance too difficult?"
|JPMorgan's value-at-risk model is reputed to have concealed rather than reveal flaws in financial risk management.|
GRC is one of those good ideas with unintended consequences. GRC has been hijacked by legislators, academia, technocrats, lawyers and accountants. Too many experts have taken complex GRC models to upstage the truest ingredients of GRC: common sense, focus, responsibility and consequences.
People's values, authority and decision-making abilities trump the best GRC policies and models.Values: the guiding measures of the principles for profit are critical and lay the foundation for what you look for and don't, what you say, "yes" to and don't. These are things not to be compromised. These are things that define a leader and drive his demonstrated behavior daily. Authority: there are positions of responsibility and titles of accountability that too often create unchallenged authority to override good advice, good policies and good procedures. Very few are going to tell their boss' boss they're wrong and shouldn't sign off or do what they clearly are determined to do. Decision-making: call it distraction, greed, danger, adrenaline, pride ... they all work to filter our abilities to discern good from bad, safe from dangerous and ultimately answer the question, "Is it worth the risk?" Often we only see the perspective of consequences after the decision has been made and the ramifications become reality. JPMorgan's value-at-risk model is reputed to have concealed rather than reveal flaws in a 20-year reputation as a model for financial risk management and embedding in Basel capital rules. Being a laymen, as I understand VaR, the model pulls together the thousands of positions taken on by a big bank, runs them through a set of mathematical formulas and probability assumptions and provides a single, easy-to-digest number. The number was the amount of money a bank would stand to lose from daily trading operations. The larger the VaR number, the bigger the potential daily trading loss at the bank. Well in the ol' garbage in/garbage out reality of mathematical algorithms, some of the info was flawed, so the number wasn't the number. Translation: Minus $2 billion instead of plus billions. Never put mathematical models over human decision-making, especially when dealing with other people's money. When giants stumble, other people's money gets affected. GRC is a common-sense challenge leaders in business must accept as their landscape to move toward their company goals. It is a curious formula with some quantitative and a lot of qualitative dimensions that come together to ensure companies continue to profit without risking more than they can afford to lose.
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