Understanding a firm's true risk exposures requires examining not just risks on the balance sheet, but also off-balance-sheet risks that are sometimes more difficult to identify and often not so easy to quantify. Latent risks from certain complex products and certain risky activities should be properly recognized, because they can manifest themselves when market turbulence sets in.
Stress testing and scenario analysis are of paramount importance here. Even when risks are properly identified and measured, that information needs to be presented to senior management and to others in the firm who can use it in their decisionmaking, and presented in a timely way. In other words, information should be adequately distributed both vertically and horizontally.