Risk Management Watch: Firms Re-Thinking Risk Management Models
Efforts to bolster the struggling financial markets on Monday failed miserably. The House defeated a $700 billion emergency rescue for the nation’s financial system, leaving lawmakers and the Bush administration scrambling to pick up the pieces, according to the AP. Following the vote, the Dow plummeted 777 points – more than the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.
The bailout bill would have allowed the government to buy up toxic assets, such as bad mortgages and other sour assets held by troubled banks and other financial institutions. The aim of the legislation was to bolster those companies’ balance sheets, making them more apt to lend, lifting a huge weight off the back of the economy, according to the AP.
Democratic leaders say the House will reconvene Thursday, leaving open the possibility that lawmakers could salvage a reworked version of the bill. In the meantime, the AP quotes Paulson as saying he would work with other regulators “to use all the tools available to protect our financial system and our economy.”
As the government struggles to find a solution to the financial crisis, a slew of firms are already taking steps to avoid the mortgage problems that have taken a toll on their balance sheets. As a result the emphasis on risk is growing. A slew of firms are adding new Chief Risk Officer positions. A new survey also finds that market volatility and regulatory issues are reshaping how North America’s pension portfolios are being managed. In fact, more than 75% of senior finance executives across Canada and the United States said they plan to focus on reducing risk in their defined benefit pension portfolios, rather than seek greater return on assets, according to the second joint CFO Research Services/Towers Perrin study.
Risk management has become a staple of how financial service firms conduct business, according to CCH Wall Street. Experts agree it was the failure of risk management systems in place that led to the collapse of four of the largest firms in the industry. CCH Wall Street contends that regulators and compliance departments will both have to rethink existing risk-management models.
Executive search firm, A.E. Feldman, says this trend has increased the significance of risk management jobs. As firms struggle to minimize losses, experienced Chief Risk Officers and Risk Managers are essential. Industry veterans recruiting for A.E. Feldman, point out that Chief Risk Officers who have been tested by previous market cycles are being handed more power.
Risk is the Name of the Game
Experts agree there was no one mistake or one bad investment that led to the credit crisis. Rather the meltdown was caused by a series of interlocking risky investments, piled onto other risky investments. Now, the issue of risk assessment is at the forefront of both regulatory scrutiny and firms’ compliance programs, reports CCH Wall Street. The report quotes Jay Baris, Partner at the law firm of Kramer Levin Naftalis & Frankel, as saying, “On the regulatory side, firms will see risk assessment jump to the top of the list of priorities during sweep exams. They’ll want to know how a firm assesses risk, how it informs clients and what it does if there’s an issue.”
Despite the renewed emphasis on risk, Baris adds that it will never go away because of its importance to the Wall Street way of life, according to CCH Wall Street. “You can’t remove all incentive to take risk. Otherwise, there’d be no Wall Street,” Baris says. “Firms need to beef up their risk management. If you are betting on a particular sector, you should have an adequate hedge.”
Pensions Focusing on Risk
Increased market risk in a low return environment has forced pension managers to increase their emphasis on managing risk versus seeking greater return on assets, according to a recent CFO Research Services/Towers Perrin study. The research shows that now more than ever, companies need to use increasingly sophisticated tools and approaches to protect their investments and ensure that pension funds deliver the benefits promised to plan participants.
“After the highs and lows of the past several years, we’re in an economic environment where being ready for storm conditions is the new normal,” said Monica McIntosh, National Leader of Towers Perrin’s Asset Consulting practice in Canada. “The study shows that in this new world, finance executives are reviewing their pension investment strategy from a broader enterprise risk perspective to avoid undesirable and unacceptable consequences in terms of funded positions and company costs.”
The survey’s findings also indicate that companies are making incremental changes in pension plan design. Driving the strategy are regulatory changes and the financial climate. More than 75% of senior finance executives across the U.S. and Canada plan to focus on reducing risk in their defined benefit (DB) pension portfolios, rather than seek greater return on assets.
More than half, 62%, of the executives surveyed also noted the main reason for rethinking their pension strategies was the result of changes in regulation, legislation or accounting standards. Additional catalysts that have prompted changes in plan design include recent financial market events (41%) and changes in company performance (33%) — both of which have placed tremendous pressure on finance teams and pension portfolios.
“It is quite clear that the combination of difficult investment returns, increased regulations and more stringent funding requirements are forcing senior finance executives to reconsider their pension risk strategies,” said Sylvia Pozezanac, Towers Perrin Principal and Leader of the firm’s Retirement Risk Solutions business practice.
To learn more or inquire about job trends in risk management the lines of communication are open. Contact the Mitch Feldman, President of A.E. Feldman, and the firm’s executive recruiting team here.
