I have several times on this blog discussed the purpose of financial risk management. Why do we perform it? Is it primarily an accounting issue with the purpose of reducing volatility in the income statement? Or is it an activity we perform to actively manage and choose the risks to fit into our business activities? In short: is financial risk a business risk or an accounting risk?
For the past 10 years we have been very focused on managing risk so it complies with hedge accounting principles. But after the crisis everyone could see that financial risk actually is a business risk and hedging only postpones the effect and hedge accounting is mainly window dressing. The underlying task of choosing the strategic financial risk position is the issue. The financial risk has been delegated to treasury to manage through policies. We learnt from the crisis it is not that easy to escape the effects of financial market volatility. Instead the financial risk position has to be one parameter affecting the overall strategy of the company, for instance when deciding of locations for operations. This in turn requires an analysis leading to what the management expects of future financial developments and how to balance all business risks, including financial, into a combined risk profile.
The European Treasurers’ Peer Group is discussing this issue and the hedge accounting perspective is loosing its grip on risk management. There is a difference between being effective and being efficient.
