No Result
View All Result
SUBSCRIBE | NO FEES, NO PAYWALLS
MANAGE MY SUBSCRIPTION
NEWSLETTER
Corporate Compliance Insights
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
No Result
View All Result
Corporate Compliance Insights
Home Risk

Why Strategic Risks Are Ignored

by James Bone
September 1, 2016
in Risk
The reason we don’t take action to mitigate major risks

Eight years after the Great Recession, U.S. markets have reached new highs and the economy is close to full employment, but a general unease about the recovery remains just below the surface. In the aftermath of the financial shocks of 2007 and 2008, the Department of the Treasury created the Financial Stability Oversight Council (FSOC) largely to identify systemic risks to the economy and financial markets. Each year for the past six years, the Financial Stability Oversight Council (Council) has published an Annual Report. On June 21, 2016 the FSOC published its sixth report in the series.

“The Council’s annual report is a vital vehicle to publicly highlight potential threats to financial stability and is another example of how Wall Street Reform has improved coordination among financial regulators,” said Treasury Secretary Jacob J. Lew. The Council’s work is centered on 12 threat themes with general guidance for addressing each. The full report can be found at the above link, and the list of 12 threat themes follows below:

  • Cybersecurity
  • Risks Associated with Asset Management Products and Activities
  • Capital, Liquidity and Resolution
  • Central Counterparties (CCPs)
  • Reforms of Wholesale Funding Markets
  • Reforms Relating to Reference Rates
  • Data Quality, Collection and Sharing
  • Housing Finance Reform
  • Risk Management in an Environment of Low Interest Rates and Rising Asset Price Volatility
  • Changes in Financial Market Structure and Implications for Financial Stability
  • Financial Innovation and Migration of Activities
  • Global Economic and Financial Developments

Council membership is represented by the chairs of 14 regulatory agencies including the Secretary of the Department of the Treasury, Jacob J. Lew. The Council is an esteemed committee with its fingers on the pulse of systemic threats that have the potential to impact financial stability. However, if this is the first time you have seen the list, you may not be alone. The first annual report, published in 2012, lists a shorter version of the same threats as the sixth Annual Report.

This begs a question: If the list of potential systemic risks to financial stability has grown larger over the last six years, are U.S. markets ignoring these threats at the risk of a tail event? More importantly, why do we routinely ignore strategically systemic risks?

Has there ever not been a time after a systemic event when you’ve heard from either the news media or market pundits, “we didn’t see that coming?” It is a completely human trait to ignore the risks that are present but have not occurred or that have caused large systemic impacts broadly across financial markets. Each of us experience risks differently, as demonstrated in the Great Recession. While many of the banks and other financial services companies suffered as liquidity dried up, Silicon Valley flourished over the last eight years, funded by alternative capital from the private markets and low-interest rates. Silicon Valley was not the only example. The energy sector single-handedly supported economic and employment growth due to a new technology called “fracking” and low rates from capital markets.

The U.S. markets have become more adroit at adapting quickly to shocks in the marketplace, creating more resilience than in the past. While some industries falter, other industries have filled the space, pushing the economy forward. But we haven’t answered the question. Have systemic risks risen to a point where inaction may lead to shocks that become harder to bounce back from? In other words, as the list of systemic risks grow, does the potential for two or more of these threats occurring simultaneously increase, leading to another “I didn’t see that coming” moment?

I have coined terms to define this question. The first is Risk Deafness. You won’t find a definition for “risk deafness,” because this is the first time it has been used. Risk deafness is the result of ignoring or not believing in the high probability of a threat occurrence. Risk deafness is a form of confirmation bias in that, if the risk does not occur, the lack of occurrence is proof of the low probability of the event. This may partly explain why the FSOC’s list has grown over six years with little meaningful change in the assessment of the threats.

The second term coined to define this question is Risk Blindness. “Risk blindness” is the result of insufficient information or methods to assess how the threat, if it were to occur, would adversely impact you or your organization in a meaningful way. In other words, we are blind to the severity of the threat’s impact. The two biases work together to explain why, when faced with the challenge of assessing uncertainty, we tend to ignore it until it happens and assume that we will be able to successfully address the problem in the same way we have in the past.

It is far easier to ignore threats we hope don’t happen and much harder to think about responding to an event they might occur. It’s even harder when two or more of these threats converge in 100-year events that no one saw coming. “Ignore” and “ignorance” appear to come from the same Latin root. “Ignoring” is the act of avoiding paying attention[i]. “Ignorance” is a state of being uninformed.[ii] Now that you know, there is no longer a reason to ignore these threats.

[i] https://en.wikipedia.org/wiki/Ignoring

[ii] https://en.wikipedia.org/wiki/Ignorance

Eight years after the Great Recession, U.S. markets have reached new highs and the economy is close to full employment, but a general unease about the recovery remains just below the surface. In the aftermath of the financial shocks of 2007 and 2008, the Department of the Treasury created the Financial Stability Oversight Council (FSOC) largely to identify systemic risks to the economy and financial markets. Each year for the past six years, the Financial Stability Oversight Council (Council) has published an Annual Report. On June 21, 2016 the FSOC published its sixth report in the series.

“The Council’s annual report is a vital vehicle to publicly highlight potential threats to financial stability and is another example of how Wall Street Reform has improved coordination among financial regulators,” said Treasury Secretary Jacob J. Lew. The Council’s work is centered on 12 threat themes with general guidance for addressing each. The full report can be found at the above link, and the list of 12 threat themes follows below:

  • Cybersecurity
  • Risks Associated with Asset Management Products and Activities
  • Capital, Liquidity and Resolution
  • Central Counterparties (CCPs)
  • Reforms of Wholesale Funding Markets
  • Reforms Relating to Reference Rates
  • Data Quality, Collection and Sharing
  • Housing Finance Reform
  • Risk Management in an Environment of Low Interest Rates and Rising Asset Price Volatility
  • Changes in Financial Market Structure and Implications for Financial Stability
  • Financial Innovation and Migration of Activities
  • Global Economic and Financial Developments

Council membership is represented by the chairs of 14 regulatory agencies including the Secretary of the Department of the Treasury, Jacob J. Lew. The Council is an esteemed committee with its fingers on the pulse of systemic threats that have the potential to impact financial stability. However, if this is the first time you have seen the list, you may not be alone. The first annual report, published in 2012, lists a shorter version of the same threats as the sixth Annual Report.

This begs a question: If the list of potential systemic risks to financial stability has grown larger over the last six years, are U.S. markets ignoring these threats at the risk of a tail event? More importantly, why do we routinely ignore strategically systemic risks?

Has there ever not been a time after a systemic event when you’ve heard from either the news media or market pundits, “we didn’t see that coming?” It is a completely human trait to ignore the risks that are present but have not occurred or that have caused large systemic impacts broadly across financial markets. Each of us experience risks differently, as demonstrated in the Great Recession. While many of the banks and other financial services companies suffered as liquidity dried up, Silicon Valley flourished over the last eight years, funded by alternative capital from the private markets and low-interest rates. Silicon Valley was not the only example. The energy sector single-handedly supported economic and employment growth due to a new technology called “fracking” and low rates from capital markets.

The U.S. markets have become more adroit at adapting quickly to shocks in the marketplace, creating more resilience than in the past. While some industries falter, other industries have filled the space, pushing the economy forward. But we haven’t answered the question. Have systemic risks risen to a point where inaction may lead to shocks that become harder to bounce back from? In other words, as the list of systemic risks grow, does the potential for two or more of these threats occurring simultaneously increase, leading to another “I didn’t see that coming” moment?

I have coined terms to define this question. The first is Risk Deafness. You won’t find a definition for “risk deafness,” because this is the first time it has been used. Risk deafness is the result of ignoring or not believing in the high probability of a threat occurrence. Risk deafness is a form of confirmation bias in that, if the risk does not occur, the lack of occurrence is proof of the low probability of the event. This may partly explain why the FSOC’s list has grown over six years with little meaningful change in the assessment of the threats.

The second term coined to define this question is Risk Blindness. “Risk blindness” is the result of insufficient information or methods to assess how the threat, if it were to occur, would adversely impact you or your organization in a meaningful way. In other words, we are blind to the severity of the threat’s impact. The two biases work together to explain why, when faced with the challenge of assessing uncertainty, we tend to ignore it until it happens and assume that we will be able to successfully address the problem in the same way we have in the past.

It is far easier to ignore threats we hope don’t happen and much harder to think about responding to an event they might occur. It’s even harder when two or more of these threats converge in 100-year events that no one saw coming. “Ignore” and “ignorance” appear to come from the same Latin root. “Ignoring” is the act of avoiding paying attention[i]. “Ignorance” is a state of being uninformed.[ii] Now that you know, there is no longer a reason to ignore these threats.

[i] https://en.wikipedia.org/wiki/Ignoring

[ii] https://en.wikipedia.org/wiki/Ignorance


Previous Post

Artificial Intelligence – The New Superpower for Compliance

Next Post

Would Willy Wonka Be A Good Compliance Officer?

James Bone

James Bone

James Bone’s career has spanned 29 years of management, financial services and regulatory compliance risk experience with Frito-Lay, Inc., Abbot Labs, Merrill Lynch, and Fidelity Investments. James founded Global Compliance Associates, LLC and TheGRCBlueBook in 2009 to consult with global professional services firms, private equity investors, and risk and compliance professionals seeking insights in governance, risk and compliance (“GRC”) leading practices and best in class vendors.
James is a frequent speaker at industry conferences and contributing writer for Compliance Week and Corporate Compliance Insights and serves as faculty presenter and independent consultant for several global consulting firms specializing in governance, risk and compliance, IT compliance and the GRC vendor market. James created TheGRCBlueBook.com to provide risk and compliance professionals with transparency into the GRC vendor marketplace by creating a forum for writing reviews on GRC products and sharing success stories on the risk practices that are most effective. James is currently attending Harvard Extension School for a Master of Arts in Management with an emphasis in accounting and finance. James received an honorary PhD in Letters from Drury University in Springfield, Missouri and is a member of the Breech Business School Hall of Fame as well as the Missouri Sports Hall of Fame. Having graduated from the Boston University Graduate School of Education, James received his M.Ed. in Management and Organizational Design in 1997 and a Bachelor of Arts in Business Administration from Drury University in 1980.  

Related Posts

NAVEX Top 10 Risk and Compliance Trends 2023 ebook

Top 10 Trends in Risk & Compliance for 2023

by Corporate Compliance Insights
March 29, 2023

Industry experts predict the risk and compliance trends we're likely to see in 2023 eBook Top 10 Trends in Risk...

parliament

Coming Soon to the UK: Sweeping Corporate Criminal Liability Reforms?

by Peters and Peters
March 28, 2023

UK legislators have proposed major amendments to the Economic Crime and Corporate Transparency Bill currently passing through Parliament. If adopted,...

wind turbines

What Companies Around the Globe Need to Know About EU Sustainability Reporting

by John Peiserich
March 28, 2023

By the beginning of next year, large companies in the EU or that do a substantive amount of business in...

amsterdam

At a Gathering of Compliance Practitioners, No Shortage of Food for Thought

by Mary Shirley
March 28, 2023

Last week, about 300 ethics and compliance professionals descended upon Amsterdam’s Hotel Okura to participate in SCCE’s European Compliance &...

Next Post
Lessons in ethics and compliance

Would Willy Wonka Be A Good Compliance Officer?

Compliance Job Interview Q&A

Jump to a Topic

AML Anti-Bribery Anti-Corruption Artificial Intelligence (AI) Automation Banking Board of Directors Board Risk Oversight Business Continuity Planning California Consumer Privacy Act (CCPA) Code of Conduct Communications Management Corporate Culture COVID-19 Cryptocurrency Culture of Ethics Cybercrime Cyber Risk Data Analytics Data Breach Data Governance DOJ Download Due Diligence Enterprise Risk Management (ERM) ESG FCPA Enforcement Actions Financial Crime Financial Crimes Enforcement Network (FinCEN) GDPR HIPAA Know Your Customer (KYC) Machine Learning Monitoring RegTech Reputation Risk Risk Assessment SEC Social Media Risk Supply Chain Technology Third Party Risk Management Tone at the Top Training Whistleblowing
No Result
View All Result

Privacy Policy

Founded in 2010, CCI is the web’s premier global independent news source for compliance, ethics, risk and information security. 

Got a news tip? Get in touch. Want a weekly round-up in your inbox? Sign up for free. No subscription fees, no paywalls. 

Follow Us

Browse Topics:

  • CCI Press
  • Compliance
  • Compliance Podcasts
  • Cybersecurity
  • Data Privacy
  • eBooks Published by CCI
  • Ethics
  • FCPA
  • Featured
  • Financial Services
  • Fraud
  • Governance
  • GRC Vendor News
  • HR Compliance
  • Internal Audit
  • Leadership and Career
  • On Demand Webinars
  • Opinion
  • Resource Library
  • Risk
  • Uncategorized
  • Videos
  • Webinars
  • Well-Being
  • Whitepapers

© 2022 Corporate Compliance Insights

No Result
View All Result
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe

© 2022 Corporate Compliance Insights

Welcome to CCI. This site uses cookies. Please click OK to accept. Privacy Policy
Cookie settingsACCEPT
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT