Press release

18 June 2008

Banks failed to adequately implement risk management systems in the lead up to the credit crunch, delegates at The Actuarial Profession’s Finance, Investment and Risk Management (FIRM) Convention in Manchester heard.

Guest speaker Professor William Perraudin said that while many banks and other financial institutions had developed elaborate risk management systems, they focussed too little on the liquidity component of risk and had not been sufficiently integrated into business decision-making to prevent significant losses.

In his speech titled Liquidity Risk and the Credit Crunch, Professor Perraudin said: “One of the striking aspects is that banks had already been worrying about liquidity and many had been looking at their risk management.

He said the effectiveness of risk management models depended on the way they related to the business system within an institution.

“You can develop elaborate risk management models, but if the systems are not genuinely integrated with business decision-making, they will not prevent problems.”

He also said that in order to prevent future crises, financial institutions needed to improve:

• the comprehensiveness of liquidity management systems;
• liquidity limit systems and the horizon over which they operate;
• external and internal liquidity pricing the cashflow modelling of future funding gaps;
• callibration of stress scenarios;
• development of contingency planning based on stress scenarios.

“The credit crunch is an event that we did not foresee and there are some important lessons we can learn. The systems firms developed appeared sufficient, but experience shows us they were not,” he said.

Professor Perraudin holds a Chair in Finance at the Tanaka Business School at Imperial College and is a Director of the software firm Risk Control Limited. He formerly worked part-time for seven years as special advisor to the Bank of England.

The FIRM Convention ran between 16-17 June at the Hilton Manchester Deansgate Hotel.

Enquiries: Tel. Fleur Morrison on 020 7632 1453 or email fleur.morrison@actuaries.org.uk

Notes to Editors

1. Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
2. Members of the Profession have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
3. The Profession is governed jointly by the Faculty of Actuaries in Edinburgh and the Institute of Actuaries in London. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.

About Tanaka Business School

Tanaka Business School is a world-class provider of business education and research, focusing primarily on Imperial College’s well-established strengths. The School possesses recognised, international expertise in three specialist areas: finance; innovation and entrepreneurship and healthcare management.

It is the only European School to have appeared in the Financial Times’ “Best in Entrepreneurship’ table, every year since the assessment began. The School's Innovation and Entrepreneurship group is the leading research group of its kind in Europe, having received over £25m in funding from governmental and corporate sponsors.

The School offers bespoke executive education, MBA in full-time, Executive and Distance Learning modes; Master's programmes in Finance; Risk Management and Financial Engineering; Actuarial Finance; International Health Management; Management and a Doctoral programme. www.imperial.ac.uk/tanaka