In this episode, we explore Prof. Tom Butler’s groundbreaking paper, "Time for a Paradigm Change: Problems with the Financial Industry’s Approach to Operational Risk." If you’ve ever wondered why banks seem to repeat the same risk failures — despite layers of regulation — this is a must-listen!
What’s Broken in Risk Management?
The financial industry’s obsession with historical loss data is missing the bigger picture. Instead of looking forward, banks fixate on past losses to determine capital allocation — leaving them blind to emerging risks.
The collapse of Credit Suisse in 2023 serves as a case study in risk mismanagement, reinforcing the fragility of financial institutions.
The Three Lines of Defense model (3LoD) isn’t working—risk ownership is diluted, leading to check-the-box compliance instead of proactive management.
A Bold New Approach: Risk Accounting
Prof. Butler argues for Risk Accounting, a quantitative, forward-looking methodology that integrates risk into financial reporting—something the current framework lacks.
A granular, AI-enabled risk measurement system could revolutionize the way financial institutions track, aggregate, and act on risk before it’s too late.
This approach is designed to break the cycle of "profits privatized, losses socialized"—a pattern that ultimately puts the burden of financial failures on society.
Why This Matters for You Whether you're a risk professional, regulator, or just someone interested in financial stability, this episode will challenge the way you think about risk management. It’s time to move beyond outdated models and embrace a data-driven, proactive approach to non-financial risk.
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