Risk Management Failures - Stulz - Unknown Risks

[CFO2013]

Hi,

Can someone explain me what will constitute a risk management failure for unknown risks. In Rene Stulz paper "Risk Management Failures" an obscure statement reads the followings :

"The unknown risks represent risk management failures are risk that, had the firm's managers know about them , their actions would have been different.
"
Thanks in advance.

CFO2013

 

[ShaktiRathore]

Risk management takes into account the various risks that the firm can face in the future. If out of blue some rare event occurs then all the plans of saving the firm from this rare event can go to jeopardy. Managers are not able to anticipate these risks , had they anticipated the risk in advance they would have risk management in place to face these risks. But sine there are no risk management plans to face these rare risks the entire risk management goes awry and the firm is not able to face the risk and thus affected by it. Assessing the risks in advance is a difficult job rest aside the assessing of the rare events like the recent financial crisis or some operational risk(trader speculating false positions), since these risks come out of blue which nobody anticipates like who would have anticipated the happening of the recent financial crisis, it certainly was a shocking event which led to the failure of risk management systems of majority of investment banks even collapse of some like Lehman brothers. Had these risks were well defined and considered by banks in advance they would not had faced the crisis like situation.
Once the crisis happened the banks were faced with high liquidity risk, credit defaults. Since severity of these risks were not asses by firms in advance they were not incorporated adequately in risk plans. Operational risk like trader creating large speculative positions with heavy losses can come out of blue can affect the entire risk management plan. Since the risk management in plan was not able to prevent this risk , the plan is in itself is considered as a failure.

thanks