Risk Management Watch: Banks Continue to Shore up Risk Teams, Restore Confidence
Société Générale has made another move to restore its reputation in the wake of the massive trading scandal that cost the bank a staggering $7.1 billion. The French bank has announced it will replace its head of investment banking, Jean-Pierre Mustier, with Michel Péretié, the former Chief Executive of Bear Stearns in Europe. Mustier will remain at the bank but his new functions within the group have not yet been disclosed.
Mustier had presided over a division that was one of Société Générale’s main earnings drivers, according to the WSJ. The report goes on to say that before the scandal, Mustier was widely considered the likely successor to Daniel Bouton, who was then the bank’s Chairman and Chief Executive. Bouton stepped down as CEO last month, although he retained his role as Chairman at the request of the bank’s board, reports the WSJ.
Investigators into the trading scandal say the French bank’s management failures and culture of risk-taking were partly to blame for failing to identify the unauthorized trades which cost the bank billions. Experts say the scandal shows just how lax risk management had been. This problem however is not confined to Société Générale. An International Organization of Securities Commissions report concludes that many institutional investors and investment banking firms had inadequate risk modeling and internal controls in place leading up to the credit crisis.
Well, today things are changing rapidly. A senior-level industry veteran and recruiter working with executive search firm, A.E. Feldman, says risk management jobs are more important now than ever before. Financial institutions are working to shore up their risk teams.
Since the massive trading scandal broke in January, Société Générale has made multiple attempts to repair the damage suffered by its reputation and its balance short. In addition to replacing Bouton as CEO, the bank raised 5.5 billion euros (about $8.5 billion) in new capital from shareholders. It is also investing more than 100 million euros (about $155 million) to upgrade its internal risk control systems, reports the NYT.
In a statement to shareholders, Societe Generale’s board said it approved the conclusions of both reports, according to the AP. The board said the bank is tightening computer security, reinforcing controls and taking more account of the possibility of fraud. The AP report also notes that deeper reforms, such as the creation of a team dedicated to preventing fraud, “significant investments in security for information technology,” and a campaign to raise staff awareness have been launched at Societe Generale and will be completed by 2010.
IOSCO: Focus on Risk
The International Organization of Securities Commissions (IOSCO) has published a report which addresses the underlying causes of the subprime crisis as well as the implications for international capital markets. It also makes recommendations concerning the issues facing securities regulators.
“This report makes clear that, while financial innovation is to be encouraged and plays an important role in the allocation of capital and risk, new financial products need to be accompanied by a thorough analysis of the risks as well as benefits they may bring. This report also highlights the need for all market participants, institutional investors and financial regulators to focus on adequate risk assessment and risk management,” according to SEC Chairman and Co-Chair of the IOSCO Task Force, Christopher Cox.
The IOSCO Task Force found that many institutional investors and investment banking firms had inadequate risk modeling and internal controls in place to understand and address the risks they were assuming when buying many types of structured finance products, relied heavily (or even exclusively) on external credit ratings for their risk analysis, had inadequate balance sheet liquidity even when adequately capitalized, and given the work of the SSG on analyzing these issues.
Based on those conclusions, the IOSCO is recommending that:
• The Standing Committee on Market Intermediaries will survey members’ experience on liquidity risk management and liquidity standards.
• The Standing Committees on Market Intermediaries and Investment Management will undertake a study of the internal control systems of financial firms and asset managers and develop principles to address any concerns identified.
• The Technical Committee will ask originators and sponsors of securitization programs to develop best practices to reinforce their due diligence and risk management practices such that the quality of assets originated for transfer off their balance sheets is of the same quality and subject to the same evaluations as for those kept on their balance sheet.
July 30th, 2008 at 1:01 am
[...] as a top priority among executives. More than 88% of those polled say that in the wake of the Societe Generale scandal, they had taken immediate steps to improve communication between their front, middle and [...]