US News and World Report had a recent feature “20 Companies that Cratered in 2010“.

Reading their article, I can only come up with four reasons why the 20 firms went bankrupt:

  1. Overconcentration in the mortgage backed securities market.  (Ambac)
  2. Failed to adapt to competition with a new approach to the business (Affiliated Media, Mareican Media, Penton Media, Blockbuster, Movie Gallery, Newsweek, Oriental Trading)
  3. Insufficient New Products (Hummer, Mercury, Pontiac, MGM)
  4. Insufficient resilience to recession due to excess debt (Inkeepers USA, Jennifer Convertibles, Loehmann’s, Mesa Air, Uno Restuarant Holdings, Urban Brands, Swoozies, A&P)

Fully 95%, 19 out of 20 of these bankruptcies are caused by business risks.

Meanwhile, risk managers in the insurance industry are off building risk management systems that assure that there is no more than a 1/200 chance of a loss large enough to cause a bankruptcy.

But Business Risk is not on the list of risks that are being considered in the Solvency II or Basel III regimes.

Fully 95% of these high profile US bankruptcies in 2010 were caused by business risks.  Does that mean that we are building a system that assures that we are 99.5% safe from 5% of the risks?

Does this give risk managers a hint as to why top management may only want to devote a small amount of their attention to the management of those 5% risks?

Are top management spending their time paying attention to those pesky risks of Competition, Products and Resilience?

Read the exciting conclusion...

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Comment by wk chan on February 9, 2011 at 3:30pm

(Missing from the earlier posting)

Non-Financial Risk, chief of which relates to Human, as follows :-
i) knowing the knowable risks or pretense-of-knowledge syndrome with no exit strategy in place.
ii) investment risk = risk management
iii) systemic bias
iv) maths = psychology 
v) hindsight = foresight.

 

Comment by wk chan on February 9, 2011 at 3:23pm
Business Risk consists of Financial Risk and Non-Financial Risk.

Financial Risk :-
Causes of Financial Crisis -
Globalization = Risk Diversification = Systemic Risk Generation through Innovation + Incentive = Propagation of Financial Distress and Bankruptcies caused by Financial Accelerator Mechanisms = Bailout.

In summation, the whole equation is all about risk dispersion based on the notion that by scattering loan risk across capital market investors around the world, any risks of default risks have also been dispersed. Thus, on the principle that a problem shared is a problem halved, it was presumed that it would be easier for the system to absorb credit shocks. One problem is that risk dispersion has made it hard for regulators or investors to work out where credit losses might be, particularly since these exposures have been passed from banks on to institutions that are less regulated and less transparent. This is notwithstanding the fact that techniques such as securitisation have sometimes placed risk in the hands of investors who seemed ill-equipped to handle it. Such risks also spread to money market fund investors who were not aware of the implications of their exposure - and money market investors are typically a highly-conservative breed. Taken together, these two problems in turn created a third headache for bankers and policymakers - financial contagion because investors cannot easily tell where the subprime losses now lie, tended them to shun all assets connected to this field, however indirectly. This in turn, prompted them to treat the entire market sectors - such as the commercial paper market - as "contaminated" !!!!

Henceforth, explains the Solvency 2 and Basel 3 regimes as the main systemic risk to any business enterprise in a crisis is the Bank.

Non-Financial Risk, chief of which relates to Human, as follows :-
i) knowing the knowable risks or pretense-of-knowledge syndrome with no exit strategy in place.
ii) investment risk = risk mana

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