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Abstract

This article analyzes the need to reform the structure of bank risk-management services (RMS), including the sale of derivatives. It reviews the contribution derivatives make to corporate financial management and discusses threatened restrictions on bank RMS following large losses reported by corporate clients. The two major weaknesses in RMS are characterized by incentive incompatibility and asymmetric information. Steps are proposed for aligning bank RMS incentives with client objectives. This requires reskilling bank management of RMS consistent with the holistic demands of globalization on corporate operations and strategies. Additional steps are proposed for equalizing buyer-seller information on the risks of opaque derivatives. These steps involve assistance to clients in setting policies leading to position limits and loss tolerances and instituting monitoring and disclosure. © 1995 John Wiley & Sons, Inc.