With the consequences of the current financial crisis spreading to the real economy, lawmakers are exploring new regulations to govern the financial markets. The concern among market participants is that policy-makers do not fully understand how risk management does and should work, and how derivatives can be beneficial.
In the “MIT Roundtable on Corporate Risk Management” that appears in the Fall 2008 issue of Morgan Stanley’s Journal of Applied Corporate Finance, a distinguished group of academics and practitioners assess how risk management affects corporate growth and value.
For many companies, effective corporate risk management begins with an equity cushion in the capital structure. This helps to avoid raising prohibitively expensive capital following an adverse event. Excessive leverage contributed to the problems of many banks, leading to the current industry-wide de-leveraging.