20 - Case Studies

Summary

Introduction

One way to help understand enterprise risk management is to use case studies. These can illustrate the issues faced in real organisations, and the causes of a range of risk management failures. It is, unfortunately, the failures that make up the majority of case studies. This is mainly because no-one ever hears about many successful risk management initiatives. If an investment banker fails to make increasingly desperate trades because it is impossible to hide any resulting losses in a hidden trading account, then the good design of the risk management protocols will attract little attention; however, the absence of such protocols and the bankruptcy of the banker's employer will make the news and can give valuable insights into how things should not be done.

The majority of the case studies here relate to financial institutions, since these are the ones that can be related most closely to the principles in this book. However, some non-financial examples are also included, since they highlight risk management issues that face all organisations, not just those in the financial services sector.

The information for this chapter is distilled from a number of books on the various episodes described. I recommend that you read these books, not only to understand risk management more fully but also because the stories are often compelling in themselves.

The 2008 Global Financial Crisis

The 2008 global financial crisis had repercussions that still persist. The problems in the United States housing market spread to the real estate market in Europe, and to the banks with exposures to this market. Governments bailed out banks, cut spending and borrowed heavily. As of 2016, interest rates around the world are still low, and sustained economic growth seems elusive.

The financial crisis was characterised by a lack of liquidity – particularly funding liquidity – and a corresponding fall in the creditworthiness of firms and governments. Whilst the popular view is that the crisis is the fault of ‘the bankers’, it is important to understand both the background to the crisis and the particular risk management failures that caused it.

Causes of the Crisis

The Role of China

A key role in the build-up to the crisis was played by China. Over the last few decades, the Chinese economy has grown very quickly. Much of this growth has been driven by exports to theWest.