INTERVEW

Prof. Chinmoy Ghosh of Uconn Launches New Risk Management Master's Program, Set to Commence this Fall

Prof. Chinmoy Ghosh
Photo credit: University of Connecticut

How is your risk management program different from those offered at other universities?

The UConn MSFRM program will place more emphasis on practical applications, and operational and behavioral issues in risk management. Through collaboration with the financial services industry in the State of Connecticut, the program will provide a forum for interaction of academics and practitioners to focus on the practice of creating economic value by managing exposure to risk.While the theoretical component will be analytical and quantitative, the practice component will emphasize the behavioral issues and human factors in the design and implementation of internal control, communication and governance of exposure to risk.

The lack of an education does not appear to have caused the 2007-2010 global financial crisis, when highly educated and experienced finance professionals undervalued risk across the board, ranging from those who priced mortgage backed securities to those who gave it AAA rating. How differently will these people approach risk, going forward?

No, the lack of knowledge or education was not the main cause of the 2007-2010 global financial crisis. The problem is that people tend to ignore risks when the market is on an upward trend. Many new complex and hybrid securities were created during this time. Many of these instruments were originally created for hedging purposes. However, speculators were using high levels of leverage on these risky instruments. To make matters worse, there is very little regulation in these markets. So, it is wrong to say that investors did not realize the risks. They just ignored it and the absence of regulation allowed them to do so. I believe that so many people have lost so much money that there is now a greater awareness of risk than ever before.

Can innovative modeling tools keep up with the proliferation of extremely complex and innovative derivatives, or is some other additional approach in risk management required?

Yes, complex and innovative derivative securities are difficult to explain to investors, and that is unlikely to change. The approach is to train people to articulate the underlying risks in simple terms, like what is the maximum amount one can lose in a given day. Risk mitigation is costly, so investors must also be told how much it can cost them to mitigate some risk. In my view, the most important change in the market is the recognition of Risk Management as an area that needs specially trained professionals, and these professionals must be engaged in defining the risk parameters of any portfolio.

How should the new risk manager approach external risk factors such as an increasingly volatile global financial climate coupled with the emergence of new types of risks? Given the constant change, new models become obsolete rather quickly.

Global financial climate is always shifting. It represents tremendous opportunities and great risks too. While it is true that new models must be developed, the fundamentals of risk management remain unchanged. The good news is that with the emergence of new markets in Asia and Latin America, professionals are acquiring training in financial risk management in larger numbers. These individuals are not only trained in the fundamentals, they are also conversant with the unique culture and risks in their domestic countries. They are also extremely proficient in the mathematical and statistical models. International associations like GARP (Global Association of Risk Professionals) have regular training programs and certificate exams to qualify risk professionals worldwide. So, the environment for risk management training is improving constantly.

How did all the warning systems fail in the recent financial meltdown? Do companies have enough resources to set up early warning systems and risk mitigation tools?

Companies realize that the cost of not having a risk management system is potential failure of their business. That is why companies are now making investments in training personnel in financial risk management tools. ERM (Enterprise Risk Management) is now practiced in every large company. In essence, companies are trying to find resources and create opportunities in risk management within the organization. That trend is expected to continue.

The organizational model plays a key role in identifying risk, a top-down process beginning with senior executives. Who is your target student base?

This program is targeted to benefit risk management professionals involved in the definition, specification, measurement, pricing, and mitigation of credit risk, interest rate risk, currency risk, overall market risk, and operational risk in financial asset management, wealth management, arbitrage strategies, restructuring and combinations, and alternative investments. Students aspiring to enter the money management profession in pursuit of long-term careers will also benefit from the program. It is expected that most students will be drawn from the large concentration of professionals engaged in money management in the greater Stamford area.

What are some job opportunities for your students upon graduation?

The recent economic crisis is likely to have long-term effects on the financial sector, inducing structural changes in response to stricter regulation and greater oversight. Several functional areas in the financial system may contract with adverse effects on career opportunities in finance. While the viability of the MSFRM program may be questionable in this environment, based on our discussion with finance professionals and alumni, we believe that the adverse impact on jobs will be temporary, albeit longer than usual, and the emphasis on the measurement and mitigation of risk will create new career opportunities in financial risk management for the graduates of our program. Offering the program at Stamford is strategic because of the concentration of the fund management industry in Stamford.