By Rachel Wolcott

LONDON, June 14 (Thomson Reuters Accelus) - It may seem like a subtle difference, but most of what banks call ‘risk management’ is often more akin to ‘risk measurement’. It is a myth that banks are in possession of fancy gadgetry that allows them to measure risk on a minute-by-minute basis from a specialised risk-control tower and react to it effectively, thus averting catastrophe. Instead, the financial crisis and trading losses, such as JPMorgan’s $2 billion blow-up in May, have shown that by the time banks measure and understand their risks, it is too late. Risk management is not about controlling risk, but about offsetting its impact after the fact.

Far from being a powerful high-tech unit within a firm that is charged with hedging risks on a macro basis — the way, for example, that JPMorgan’s chief investment office has been portrayed — risk management is more fragmented and limited. That is why many banks were badly hit when Lehman Brothers collapsed in 2008. It was just too difficult to get a picture of what their positions, exposures and risks were, let alone manage them. This is because, in many cases, banks’ risk management still has more to do with number crunching and measuring risk for compliance and regulatory purposes, such as regulatory capital requirements, credit value adjustment and counterparty risk. Managing risk, however, is something few firms do well, and they are certainly unable to do so in a holistic way. (more…)