Risk Management Watch: Firms to Boost Spending on Risk Management in ‘09
Fortune 1000 companies plan to invest more in risk management in 2009 as experts anticipate new laws and regulations aimed at improving corporate risk management oversight. That’s according to the results of a recent survey conducted by OpenPages. Meanwhile, companies continue to shore up their risk management teams to better manage risk and strengthen internal controls. UBS recently announced that it has named a new Risk Chief after suffering one of the most disastrous years in the bank’s history. Chief Risk Officers who have been tested by previous market cycles are also being handed more power, reporting directly to the CEO. In keeping with this tend, just this month, Ambac Financial promoted its CRO to Chief Executive.
The global financial crisis is dramatically reshaping the financial services industry in the U.S. and around the world. Today, firms are struggling to adjust to the unfolding global economic environment. Executive search firm, A.E. Feldman, reports that risk management jobs are evolving to better manage initiatives to ensure that business objectives are met, losses are minimized, business processes are improved and greater accountability is achieved. A.E. Feldman also notes that financial and risk professionals with expertise in processes for assessing credit and counterparty risk and liquidity risk are in demand along with professionals with experience in restructuring and litigation support that can provide advice on how to respond to the evolving market conditions and subsequent regulatory changes.
Firms Shore Up Risk Teams
UBS this month announced that it has named a new Risk Chief. Joseph Scoby, who has served as Group Chief Risk Officer since October 2007) has stepped down, to be replaced by his deputy, Philip Lofts. In a statement, UBS said Scoby has decided to return to his former role as Global Head of Alternative and Quantitative Investments (A&Q) within UBS Global Asset Management. Lofts, a 20 year veteran of UBS, was previously Group Chief Credit Officer and has held a variety of risk control positions in Europe, the US and Asia-Pacific.
“Philip’s long history in risk control and deep knowledge of UBS make him extremely qualified to lead UBS’s risk organization and continue to enhance our risk management, control and reporting frameworks and processes,” said Marcel Rohner, Group Chief Executive Officer.
UBS announced a net profit in the third quarter - its first profitable quarter since the start of the crisis in mid-2007. The firm also reported $4.4 billion in losses, however, on “legacy risk positions”, mainly related to exposure to U.S. residential mortgage-backed securities. UBS warned that it could see heavy losses again in the fourth quarter of this year. UBS also noted that it continued to reduce exposures to risk positions throughout the quarter, largely through sales and to a lesser extent further writedowns. Exposures to U.S. residential real estate-related positions were also reduced by almost 50%.
Ambac Financial Group also recently announced that David Wallis, formerly Chief Risk Officer, has been promoted to Chief Executive Officer. Ambac had named Wallis to the newly created position of Chief Risk Officer, or CRO back in February - a time when the company was badly battered by losses after it ventured into guaranteeing mortgage debt, which triggered rating downgrades.
Ambac is in the midst of setting up a new municipal bond insurer as it tries to regain a safer credit profile, and higher ratings. Wallis, now CEO and a director of both Ambac and the new company, Ambac Assurance Corp (AAC), says his immediate focus “is to restore confidence in our balance sheet through aggressive risk reduction.”
“David’s credit and risk management expertise and wide breadth of experience prior to his taking on the role of Chief Risk Officer will serve the Company well as we continue to navigate these uncertain markets,” said Michael A. Callen, who served as Abmac’s Interim President and Chief Executive Officer since January 2008.
Looking Ahead: Risk Management to Remain Top Priority in ‘09
A recent OpenPages survey, which polled 150 strategic risk, governance and finance professionals, finds that when it comes to Governance, Risk and Compliance (GRC) activities, organizations expect to boost spending on risk management initiatives next year. Moreover, respondents say a software platform to help integrate and manage all of their efforts will be crucial to their success.
The overwhelming majority of those polled by OpenPages, 90%, expect new laws and regulations to be introduced next year in an effort “to improve corporate risk management oversight.” More than half of those polled also believe the current crisis has increased the priority of enterprise-wide risk management, and nearly 60% said that the crisis has put the risk management function in the spotlight for the CEO and board.
Focus on ERM
Companies also revealed in the OpenPages survey that their biggest GRC challenge in the coming year will be to “converge GRC initiatives across the enterprise.” The majority of respondents, 70%, characterized their current state of GRC management efforts as siloed.
A number of experts say the risk management needs of financial institutions are evolving to go beyond regulatory risk and must break down traditional risk silos to drive toward an enterprise-wide risk view.
Appearing before a recent Senate Banking Committee hearing, Federal Reserve Vice Chairman, Donald L. Kohn and Scott Polakoff, Deputy Director of the Office of Thrift Supervision (OTS) 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. Business leaders are gravitating towards enterprise risk management in assessing a firm’s strategic objectives and associated risks.
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.
Looking ahead, companies polled by OpenPages revealed they are poised for improvement. Less than 10% characterized their ERM efforts as excellent, as described by S&P’s ERM ratings categorization.
“This is a defining moment for our economic system that underscores the critical importance of enterprise risk management not just within the financial services sector but across all industries. Not only will GRC spending emerge as one of the few areas of investment in 2009, but we expect that more companies will take a more programmatic approach to risk management in 2009,” said Michael J. Duffy, CEO & President, OpenPages.
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