Systemic Risk – Challenging Assumptions

Risk managers should contribute to long range planning and analysis. They can cause planners and modellers to recast their assumptions. In a recent workshop, participants and I were discussing risk assessment of the firm’s strategic plan, and considered wider systemic risk and emerging risk, that could undermine the organization.

On the issue of strategic risk, I first draw the reader’s attention to my 6-part series in which I discussed high quality risk assessment and future scenarios; strategic identity; stakeholders; and environmental scan. The essential point in that series is that risk assessment should be part of a complete research and planning process, including methods to deal with “black swan” risks and high uncertainty.

In this post, I want to elaborate on the idea of risk managers questioning assumptions that typically go unchallenged.

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Risk Assessment as Due Diligence in Finance

Questioning the foundations of the economy
In the previous post, issues were raised about the Canadian financial system: Is Canada relatively immune from a deepening depression in the US and Europe? Are Canadian banks, in particular, on solid ground? The main implication I am trying to point out for risk managers is that, in whatever context you happen to be working, a multi-faceted risk assessment that questions common assumptions is needed.

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Risk in Canadian Financial System

In a previous post on Canadian Financial Risk, I reported on commentator Bob Chapman’s assessment. He had said that Canada has a very solvent financial system; has always been very conservative; and that while the US and Europe are headed for a significant crisis, the magnitude of its effect on Canada should be about half of what they will experience. I expressed doubt that Canada’s isolation is really guaranteed.

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Greek Debt Crisis-Bob Chapman’s Summary

2011-10-27 / Social, Economic and Financial Risk / 0 Comments

interview-CorbettReport-Chapman-pt2This is part 2 of financial commentator Bob Chapman’s answer to my question about the actions of speculators targeting countries’ economies, and Canada’s position. In my last post, he covered Canadian Financial Risk; here I paraphrase his answer about Greece. The interview was podcast by James Corbett.

Part 2:
What happened in Greece was a combination of things…
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Canadian Financial Risk

2011-10-24 / Social, Economic and Financial Risk / 1 Comments

interview-CorbettReport-ChapmanI sent in a question on Canadian financial risk to be posed to financial commentator Bob Chapman, who is interviewed every Monday by Canadian expat James Corbett. Corbett lives in Japan, where he produces The Corbett Report on political, educational, financial and other topics. The Q/A begins just before the 31:00 mark in the podcast. I will summarize the main points of Chapman’s answer here, with the caveat that it is a paraphrase, and for the exact language, readers must go to the interview itself.
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Economic Crisis: Why ERM Did Not Fail

economic-crisisRisk management controls: not implemented — or rather, subverted

We are continuing to experience economic turmoil. After the first severe and generalized wave of economic upheaval originating in the US recession, many in risk management circles were speaking of “the failure of Enterprise Risk Management”. First, let’s not characterize what happened in those terms, because failure depends upon one’s point of view; the failure was not universal. The people responsible for what Galbraith called the “seemingly imaginative, currently lucrative, and eventually disastrous innovation in financial structures” did not fail.  (He was writing back at the time prior to the October 1987 crash, about parallels to 1929 — but might just as well have been referring to collateralized debt obligations – CDOs).
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Financial Risk Modeling

2011-09-12 / Social, Economic and Financial Risk / 1 Comments

financial-risk-modelingDo financial models support corporate values?
“My goal for the workshop is to understand: How do data modelers view the question of risks that cannot be readily quantified?  It would be helpful to discuss how financial and statistical modeling should be related to strategic planning. It would be helpful, too, to examine critically the role that assumptions and corporate values plays in doing modeling.”

Those were the goals I set for myself not only for the RIMS workshop back in March 2009: ” Risk Analysis Tools” in Miami, but also for the May 2010 session held in Toronto: “Finance for Risk Managers”. Read the rest of this entry »

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Transnational Entrepreneurship: Critique

2011-04-16 / Social, Economic and Financial Risk / 0 Comments

transnational entrepreneurship - critiqueIn the previous post on transnational entrepreneurship (TE) I gave a descriptive model showing the aspects of the problem that scholars have addressed, including individual traits; networks and social milieu; institutional regimes; as well as geographical, political and economic contexts.

What becomes clear from a review some of the literature on transnational entrepreneurship is that there are “constellations of factors responsible for specific ‘compositions’ of entrepreneurship and forms of immigrants’ adaptation” (Morawska 2005: 327) in all kinds of different case studies. A seminal piece by Alejandro Portes and co-authors (2002) is frequently cited, because it is a quantitative study that establishes transnational entrepreneurship as a (statistically, if not materially) significant phenomenon. The trouble, as I see it, is that virtually no two articles use the same definition of TE. Several authors who rely upon the Portes article to establish the construct proceed to study something that Portes himself had declared outside the definition of TE, like ethnic entrepreneurship or returnee entrepreneurship. There is no basis upon which to build a general theory if the construct is continually shifting and so has no discriminant validity.

In the special issue lead article in Entrepreneurship Theory & Practice September 2009, Drori et al. gave this definition of transnational entrepreneurs: “social actors who enact networks, ideas, information, and practices for the purpose of seeking business opportunities or maintaining businesses within dual social fields”. It is overly-general. An ethnologist would probably consider a billiards hall and the laundromat across the street as two distinct social fields. The “social actors” in question are invariably immigrants.

Transnational entrepreneurship as a topic originated from a stream of literature in which sociologists, economic geographers and others explored the implications of immigrants’ undertaking economic activity, in both the host country and country of origin, in attempts to adapt, assimilate, prosper or just overcome adverse circumstances. As the project of migration and settlement occur within a broader context, these authors discuss historical forces of colonialism, post-colonialism, 20th century economics, geo-politics, and so on. By contrast, authors in the international business stream of scholarship often construe context as the increasing and necessary process of globalization, taken quite uncritically.

International business authors seem to want to establish the idea of the Transnational Entrepreneur as a “new breed” capable of generating wealth, and to build theory to substantiate this. It may be possible, but it should be justified in terms of its significance in the wider context of an economic program, and rigorously defined as clear construct. Here is a preliminary (not exhaustive) pdf of references for transnational entrepreneurship.

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