TABLE OF CONTENTS Over the past decade, risk management has witnessed explosive growth and increased specialization. The maturity of the financial engineering discipline has fueled a frenzy in the banking sector to create ever-more exotic forms of risk packaging and risk transfer products. Banks continue to compete aggressively on the basis of their ability to transfer clients' financial risks to the capital markets. There has also been some innovation in the insurance market as insurers have developed custom products to securitize the risk of natural disasters and protect against emerging risks such as weather, cyber crime, rogue trading, and terrorism. Companies have also become more expert at self-insuring their own risks through a variety of onshore and offshore captive insurance companies. This proliferation of risk management activities occurred simultaneously with an increased specialization of risk management products and markets.
Companies at the forefront of the advances in risk management have organized their risk management function to mirror the specialization of products and markets. There are typically separate risk managers for each major category of risk (e.g., interest rate risk, foreign exchange risk, commodity price risk, credit risk, operational risk, and insurable property and casualty risks). The risk management decisions are typically not coordinated, although the overall investment in risk management activity is consolidated in the finance function. In the process, companies have lost sight of the interaction among risks. The consequence of this "silo" approach to risk management is a strategy that does not meet its objectives and costs...
