Risk Management Watch: Kohn Says Banks Learned Valuable Lessons, CROs Remain Hot Commodities
Poor risk management at top U.S. investment banks resulted in top execs missing the impact of valuation declines and liquidity shortages, said Scott Polakoff, Deputy Director of the Office of Thrift Supervision (OTS), in prepared testimony at a recent Senate Banking Committee hearing. “The risk management frameworks in place at these firms and others across the financial sector were clearly inadequate for the key problems of identifying major imbalances,” stated Polakoff.
Appearing before the same panel, however, Federal Reserve Vice Chairman, Donald L. Kohn, says primary dealers are now taking steps to better protect themselves against extreme events in the future, by strengthening liquidity and capital positions. In his testimony, Kohn added, “We also believe their management has learned some valuable lessons from the events of the recent financial turmoil that should translate into better risk management.”
Both Polakoff and Kohn also stressed the importance of a broad, enterprise-wide, top-down view of risk management. Their words underscore changes already taking place in a number of boardrooms. Right now, corporate boards continue to face unparalleled levels of business complexity, economic uncertainty, a changing political landscape, new regulations and mounting shareholder demands. As a result, business leaders are gravitating towards enterprise risk management in assessing a firm’s strategic objectives and associated risks. Executive search firm, A.E. Feldman, reports that risk management jobs are gaining significance as firms continue to shore up their risk teams and replace or add new Chief Risk Officers, which report directly to the CEO.
“The events surrounding the collapse of the mortgage-backed securities markets vividly illustrated the failure of many risk managers, senior management and boards of directors, to properly assess and manage the risks emanating from this line of business. While the products involved were sometimes complex and heavily structured, the failures were not,” said Polakoff in his testimony on Capitol Hill. He went on to say, “There was a clear lack of understanding of the downside risk of mortgage-related products and inadequate risk management at every level.”
Focus on ERM
Risk management is most successful in complex organizations when it is much more than simply a division of the firm, according to Polakoff. “We encourage firms we supervise to have a robust discussion about risk and tolerances at every level of the organization, beginning with the boards of directors and continuing through to line managers. This process, while buttressed by reporting from the enterprise management architecture, infuses a risk appetite, risk tolerance, risk understanding and risk management ethic throughout the organization, clearly conveying expectations and providing the foundation for strong management technique and minimizing the opportunity for unwelcome surprises,” he said.
The Fed’s Kohn echoed Polakoff’s ideas about managing risk. Kohn outlined steps the Fed is taking to ensure that senior management properly defines overall risk preferences. “We are reminding banks of the importance of information-sharing throughout the entire organization and of the dangers of information silos. In addition, we are strongly encouraging institutions to improve and/or build out their risk functions, so that independent risk managers are empowered to dig deep for latent risks, including concentrations that often arise only in times of stress,” said Kohn.
In short, firms must focus on enterprise risk management (ERM) to address the risks they face and the processes in place to manage those risks. ERM can be described as a risk-based approach to managing an enterprise. ERM involves the integration of strategic planning, operations management and internal controls - a framework to safeguard a firm against losses, earnings surprises, and other financial risks.
CRO’s Hot Commodities
As the focus on risk continues, more firms have added a Chief Risk Officer (CRO) to their top ranks to proactively manage risk and strengthen internal controls.
Cardif Pinnacle, part of the worldwide BNP Paribas Assurance Group, has announced the appointment of Ian Shackell to the position of Chief Risk Officer. Paul Glen, Cardif Pinnacle’s CEO, says, “Ian’s appointment is another step to completing my senior management team and - along with our recent acquisitions - represents a significant move forward in our strategy to develop Cardif Pinnacle. With his depth and breadth of experience, Ian will no doubt make a valuable contribution to our business.”
Aviva, the world’s fifth-largest insurance group, also recently announced the appointment of Jim Webber as group Chief Risk Officer. The appointment is still subject to regulatory approval, but Webber’s portfolio will include compliance, group business protection, economic capital and enterprise risk management. The company also says Webber will retain the economic capital elements of his current role and this internal appointment will ensure strong links between risk management and economic capital.
“As our chief risk officer, Jim will drive Aviva’s risk management strategy and Jim and I are committed to building the momentum towards a world class risk function which adds real value to the business,” says Aviva Group Finance Director, Philip Scott.
Eutelsat Communications also announced the appointment of Ignacio Gonzalez Nunez to the newly-created position of Chief Risk Officer. The company says Gonzalez Nunez’s responsibilities will cover the identification and implementation of a coordinated cross-departmental approach to risk management for Eutelsat and its subsidiaries.
“Risk management is now an integral component of an organization’s structure and a best practice among many large companies,” says Eutelsat Communications Chairman and CEO, Giuliano Berretta. He adds, “The creation of this new post will enable us to build a comprehensive risk management program and promote this model across Eutelsat and our subsidiaries in Europe, Asia and the Americas.”
