Banks more risky than hedge funds: Jorion

Keynote speaker Philippe Jorion kicked off this year’s Risk Management Conference by discussing the many lessons learned during the 2008 financial crisis. Jorion is professor of finance, Paul Merage School of Business, University of California, Irvine. While he outlined a series of major issues in the way risk was managed in the run-up to the crisis, Jorion made that point that banks have proved to be the biggest and most profound risk to the financial system in the last few years – far more than hedge funds which drew the most scrutiny from regulators during the crisis.

Among Jorion’s other major conclusions about the role of risk during the crisis — black swans aren’t to blame for all the failures by any stretch of the imagination. While “unknown unknowns” such as regulatory risk (i.e., the ban on short sales), event risk (deleveraging of investment risk) and contagion risk played a role in 2008, there were “known unknowns” like model risk and liquidity risk that could have been dealt with in 2007. Understanding that risk models have their weaknesses is key according to Jorion who noted that the most successful risk managers are able to think beyond the limits of those models.