Risk Management Lessons Worth Remembering from the Credit Crisis of 2007-2009

Abstract

This paper presents eight general principles of risk management and eight important lessons worth remembering from the Credit Crisis of 2007-2009. The Credit Crisis has clearly demonstrated the importance of a strong, independent risk management function and our eight basic principles of risk management will help institutions to craft the foundation of their risk management organizations. The Credit Crisis has also revealed the inadequacy of many standard methods in quantitative risk management and called into question the efficiency of markets in general. Our analysis of these eight lessons from the Credit Crisis provides insights into what went wrong and offers advice on how institutions can attempt to correct for these failings in the future. Detailed analysis is provided on risk management issues relating to liquidity, securitized products, certification, market risk, and policy risk.