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Journal of Financial Econometrics 2005 3(1):26-36; doi:10.1093/jjfinec/nbi007
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Journal of Financial Econometrics, Vol. 3, No. 1, © Oxford University Press 2005; all rights reserved.

New Directions in Risk Management

John Drzik
     Mercer Oliver Wyman

Address correspondence to John P. Drzik, Chairman, Mercer Oliver Wyman, 99 Park Ave., 5th Floor, New York, NY 10016, or e-mail: jdrzik{at}mow.com.

Following the 1991 recession, financial institutions invested heavily in risk management capabilities. These investments targeted financial (credit, interest rate, and market) risk management. I will show that these investments helped reduce earnings and loss volatility during the 2001 recession, particularly by reducing name and industry-level credit concentrations. I also suggest that the industry now faces major risk challenges (better treatment of operational, strategic, and reputational risks and better integration of risk in planning, human capital management, and external reporting) that are not addressed by recent investments and that will require development of significant new risk disciplines.

KEYWORDS: credit cycle, financial institutions, risk management


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