The prices of oil and houses are related, history teaches us. Scenarios can reveal such unexpected connections and limit uncertainty.
After the start of the financial crisis problems on the US housing market turned out to influence the creditworthiness of European banks and (subsequently) the rent that Euro countries pay. In classic risk management this scenario was consistently ignored. After all, if there is a ten percent chance that customers do not pay, ten percent that a loan is not refinanced and ten percent that interest rates rise sharply, the operational risk manager commonly says the probability for these three to occur simultaneously is one in a thousand (10% x 10% x 10%). But in strategic matters risks more and more turn out to be interconnected and that number work no longer adds up.
Read the complete FD Outlook article, written by Paul de Ruijter.