Risk Management Failures

Risk Management Failures

Matthieu Bouvard, Samuel Lee

Series number :

Serial Number: 
454/2015

Date posted :

September 01 2015

Last revised :

October 09 2015
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Keywords

  • Banks • 
  • risk management • 
  • Time Pressure • 
  • Delegated Trading • 
  • Coordination Failure • 
  • Global Games

We present a model in which financial firms are engaged in preemptive competition for trading opportunities and the cost of risk management increases with time pressure in financial markets. Because time pressure is in turn endogenous to risk management choices, strategic complementarities can trigger a race to the bottom: firms?

decisions to abandon risk management, while individually rational, are collectively inefficient and cause a misallocation of risks among financial intermediaries. Externalities operate through opportunity costs and agency costs, and provide a rationale for regulation that views risk management both as a coordination problem (among firms) and as a governance problem (inside firms).

Authors

Real name: 
Matthieu Bouvard
Real name: 
Research Member
Leavey School of Business, Santa Clara University