Kaplan And Mikes Case Study
EVALUATION
A key strength of the Kaplan & Mikes framework is the clarity it provides to leadership teams around their exposure to less obvious risks as a result of the decisions they make, the processes the implement and the impact of external factors on their business, while also creating awareness of the cognitive biases that may creep in to their thinking and how these can lead them astray. Evidence shows the need for such a framework – on the Irish banking crisis, Nyberg (2011 -2.9.5) tells us that “bank management seem to have been totally unprepared for both of their risks (property loan impairment and funding problems) occurring simultaneously. This must be seen partly as a direct consequence of the insufficient attention paid to the …show more content…
In the early 1990’s Iceland held €156m in foreign securities which jumped to a staggering €18bn by 2007 on the back of rapid expansion in their banking sector, creating a significant currency risk (Kevin McConnell 2015 lecture). They relied heavily on banking and it’s growth was funded in euro despite Krona being the national currency – their central bank operated in one currency while their funding profile was in another. The problem was compounded by their over-reliance on wholesale funding markets which dried up from 2007 and as they were outside the EU, they did not benefit from their protection mechanisms. The Kaplan and Mikes framework provides a number of approaches to manage strategy risk which could be used here including independent experts to bring some perspective on the risks the Icelandic banks were taking or embedded experts to challenge the volatile nature of their balance sheet and continuously monitor and influence the banks risk profile. Had measures such as these been more effective, perhaps the warning signs would not have been ignored. It would appear however that once again, reward and incentive models were not aligned to prudent risk management, instead “managers of these banks were tempted by the higher interest rates they could charge on the more risky lending, producing large, short term (apparent) profits and therefore larger bonuses” (Arnold, chapter 26). Had the banks sought to understand the inherent risks in their strategy, perhaps they could have averted their ultimate
A key strength of the Kaplan & Mikes framework is the clarity it provides to leadership teams around their exposure to less obvious risks as a result of the decisions they make, the processes the implement and the impact of external factors on their business, while also creating awareness of the cognitive biases that may creep in to their thinking and how these can lead them astray. Evidence shows the need for such a framework – on the Irish banking crisis, Nyberg (2011 -2.9.5) tells us that “bank management seem to have been totally unprepared for both of their risks (property loan impairment and funding problems) occurring simultaneously. This must be seen partly as a direct consequence of the insufficient attention paid to the …show more content…
In the early 1990’s Iceland held €156m in foreign securities which jumped to a staggering €18bn by 2007 on the back of rapid expansion in their banking sector, creating a significant currency risk (Kevin McConnell 2015 lecture). They relied heavily on banking and it’s growth was funded in euro despite Krona being the national currency – their central bank operated in one currency while their funding profile was in another. The problem was compounded by their over-reliance on wholesale funding markets which dried up from 2007 and as they were outside the EU, they did not benefit from their protection mechanisms. The Kaplan and Mikes framework provides a number of approaches to manage strategy risk which could be used here including independent experts to bring some perspective on the risks the Icelandic banks were taking or embedded experts to challenge the volatile nature of their balance sheet and continuously monitor and influence the banks risk profile. Had measures such as these been more effective, perhaps the warning signs would not have been ignored. It would appear however that once again, reward and incentive models were not aligned to prudent risk management, instead “managers of these banks were tempted by the higher interest rates they could charge on the more risky lending, producing large, short term (apparent) profits and therefore larger bonuses” (Arnold, chapter 26). Had the banks sought to understand the inherent risks in their strategy, perhaps they could have averted their ultimate