Outsourcing risk and Madoff
One of the key issues of the financial crisis was banks not knowing the value of their assets. This lack of insight has numerous reasons, but to me the main ones are: too much focus on short term profit, not being able to understand your own financial products anymore and inadequate control over your back-end business partners. In this post I want to put some of my thoughts on this last topic: the importance of monitoring the ‘health’ of the other financial institutions the bank does business with. Banks got hit by Madoff and Leman Brothers because they did not appreciate the risk they ‘imported’ by extending their value chain beyond their own borders. This issue was broad to my attention again in n a recent interview of Z24 (Dutch internet news channel) with the Chief Risk Officer of Fortis Bank Netherlands (3 billion revenue 2008, 184 billion in assets. In this interview the risk management practises of the bank were discussed and the CRO stated that the board is closely involved wi...