A key part of the mission of the Office of Financial Research (OFR) is to promote best practices in financial risk management. Today, in the second paper of its Working Paper Series, the OFR issued a paper that provides a broad assessment of risk management practices and how risk management can be improved: Forging Best Practices in Risk Management.
The paper approaches risk management from three perspectives: risk measurement by individual firms, governance and incentives, and systemic concerns. Although the paper separately evaluates each approach, it also includes a discussion on the importance of considering these three dimensions of best practices in risk management as interrelated. The paper concludes by defining important areas for continued research and for modifying the role of risk management in financial firms’ business decisions.
The Dodd-Frank Act established the OFR to, among other things, improve the quality of data and analysis for assessing threats to financial stability and responding to them. The OFR Working Paper Series makes accessible the OFR’s in-depth work to analyze and measure these threats. We expect each paper, developed in partnership between the OFR and national experts, to trigger a collaborative cycle of lively discussion among researchers and subsequent feedback that will help us fine-tune our research.
The paper’s authors are Mark J. Flannery of the University of Florida and the OFR; Paul Glasserman of Columbia University and the OFR; David K.A. Mordecai of Risk Economics, Inc., and New York University’s Courant Institute of Mathematical Sciences; and Cliff Rossi of the University of Maryland and the OFR. The paper was produced while Flannery was employed by the OFR, and Glasserman and Rossi were under contract with the OFR. The authors presented a preliminary version of the paper at an OFR conference in December: The Macroprudential Toolkit: Measurement and Analysis.
In January 2012, the OFR’s first working paper—A Survey of Systemic Risk Analytics—focused on quantitative tools for assessing threats to financial stability.
We invite researchers and other interested parties to review our working papers, discuss them, and join the new nationwide debate and process of discovery about improving financial stability.
The OFR Working Paper Series is available here.
Jonathan Sokobin is Chief of Analytical Strategy for the OFR.