Cross-Functional Knowledge Management by Shams S. M. Riad; & Demetris Vrontis & Yaakov Weber & Evangelos Tsoukatos & Alberto Ferraris

Author:Shams, S. M. Riad; & Demetris Vrontis & Yaakov Weber & Evangelos Tsoukatos & Alberto Ferraris
Language: eng
Format: epub
Publisher: Taylor & Francis (CAM)

6

The Management of Financial Risk Knowledge in the International Conditions

Darko B. Vukovic

Introduction

Knowledge management is not directly close as a discipline to finance. However, today it is not possible to imagine any decision-making in a financial institution without strategic orientations, new knowledge and innovations supported by knowledge management. The benefits from decision-making based on knowledge management are twofold: from one side, corporations (financial institutions) want to maximize their returns, and from the other side, they want to reduce their risks. In both cases, there is a need for new knowledge and experience that will help financial decision-making in the strategic orientations. This situation is even more significant when it comes to international markets. Exposure to international competition, foreign exchange rates, different international regulations and systemic risks of different countries create far greater risks for companies. One of the most important results of the use of knowledge management are new financial instruments that minimize exposure to these risks.

The absence of knowledge management has caused one of the biggest global crises in 2008–2009. Many of the largest financial corporations and institution (Bear Stearns, Lehman Brothers, AIG, Goldman Sachs, Morgan Stanley, GMAC, CIT Group, etc.) made their strategy and decisions based on markets’ historical data and a similar methodology for calculating risks and returns. Their strategy, based on the high yields of the real estate market since 2004, brought high returns on issued instruments for the several years (mostly derivatives like mortgage-backed securities [MBS], credit default swaps [CDS], etc.). However, the profit declined in the real estate markets generated multiple risks for instruments issued by such financial players. Driven by greed for high returns and neglecting the newly emerging situation or their late detection, this situation influenced all these companies to experience a failure and caused the greatest crisis of global proportions. In fact, a far greater number of companies from financial markets have caused the crisis—not only these six or seven—but they were the most famous and biggest losers. In the words of management discipline, it could be explained as an organizational routine that led them to such a situation. As a matter of fact, organizational routine can be viewed as a double-edged sword: first, it contributes to the conversion of resources into capabilities (as a main organizational function) and second, if it does not change according to the requirements of the market, it can lead to poor business strategies (in this case to bankruptcy).

Would knowledge management have saved them from failure? Surely there would have been far greater chances to protect themselves from the risk of falling prices on the real estate market. As much as they were guided by greed, none of these players would want to go bankrupt. In the case that their strategic decisions were based on systematization of knowledge and best practices, their investment strategy would be more or less different. Moreover, rating agencies Standard & Poor’s, Moody’s, Fitch Group, etc. would have downgraded the credit rating of these companies and their derivatives instruments before problems started with the realization of such assets.

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