In the aftermath of the 2007-8 Global Financial Crisis, Andrew Haldane, Chief Economist, Bank of England in a speech entitled ‘Why Banks Failed the Stress Test’ concluded that:
“Risk management models have during this crisis proved themselves wrong in a more fundamental sense. They failed Keynes’ test – that it is better to be roughly right than precisely wrong. With hindsight, these models were both very precise and very wrong.”
Required: Critically evaluate Haldane’s statement in the context of modern risk management methods such as Value-at-Risk; the evolution in risk management since the Global Financial Crisis; and a series of high-profile rogue trader and operational risk episodes.
What are the key lessons that can be drawn from these issues for the future of risk management?