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2012 risk management agenda

What changes will result from discussions, regulations and turmoil of 2011?

2012 Risk Management AgendaOne place to get wiser about the current risk agenda is the RiskMinds Europe conference, held in Geneva. The conference attracts CRO’s and other risk professionals – primarily linked to banking – from all over the world. It has achieved a superior status in the risk society with the self-reinforcing effect that it is able to muster a strong field of presenters from some of the largest banks and central institutions from all over the world.

RiskMinds Europe covered the whole range from nerdy presentations on exact risk measures to more philosophical ponderings on the future ahead.

A number of topics seemed to be reoccurring during the conference. These are the ones I would like to dwell on a bit more:

  • Risk appetite and risk tolerance.
  • Central Counterparties (CCP).
  • Enterprise risk/removal of risk silos.
  • The CRO’s increasing role and visibility in the banks.

Risk appetite

The term is somewhat self-explanatory, but there does not seem to be a clear definition of or agreement upon it across the industry. Nonetheless, the subject is high on the agenda of the board and management of several of the major banks from Germany (Deutsche Bank) to Australia (Commonwealth Bank of Australia). Crucial in this context is for the institution to have a clear attitude toward the risk taking to both expose itself enough to achieve the needed return on investment and also to be sure to stay within the borders that ensure sustainability. (Here is a great white paper you can download for more information about risk appetite. Download The Art of Balancing Risk and Reward.)

Central Counterparties (CCP)

With the encouragement from the Basel Committee for the banks to increasingly use CCP’s, this was naturally a subject of discussion. The intention of the Committee is to lower the interdependency and systemic risk in the financial sector, but there may be adverse effects.

One speech on this subject, which I found especially interesting, was delivered by Stephan Schoess from the OCC (Options Clearing Corporation). Among his arguments against the CCP’s were:

  • CCP’s will compete to attract flow and will grow to be systemically important bodies in themselves – too big to fail.
  • CCP’s will lead to a reduction in netting efficiency – deals that would formerly (pre-CCP) offset each other may now (post-CCP) generate one-way exposures and hence leave the institute worse off than it was before.

In my view, another problem in this context is that the CCP’s will be handling all of the (fairly) simple instruments, whereas the more complex financial products will still be handled OTC. Given that margins on the simpler products are under pressure, I believe that banks will have incentives to be increasingly innovative in introducing even more complex instruments to create earnings on the way forward. And these instruments will not be traded via the CCP’s. Under all circumstances, I am certain that the debate around the CCP’s and their justification is not settled yet.

Enterprise risk

In the markets of our times and with the (ever-?) increasing regulatory demands for the industry, there is a rising need for boards and managements to have the finger on the pulse with regards to the overall risk picture for their institutions. To achieve this, the silo approach (measuring and controlling market risk, credit risk etc. in separate streams) is no longer sufficient. The silos have to be bridged – or better yet, to be torn down and an enterprise view to be built from the bottom up. This will ensure the holistic view that top management needs to control risk taking in both leeway and headwind environments.

CRO’s increasing role

Based on the shifting focus, as described in the foregoing paragraphs, it seems natural to get the organizations’ risk departments more closely involved. More and more banks elevate the focus on risk to top management and board level, and CRO’s are no longer just considered cost carriers. Instead, they now increasingly get involved in strategic decision-making. As mentioned earlier, this is of course partly due to the new (Basel) regulation, but also reflects that banks are starting to consider the earnings (or non-loss) possibilities in maintaining a sharp risk profile. (This was also confirmed in the SAS and EIU 2011 survey of 315 global financial services executives where more than 50 percent of the respondents said that “boards are now paying a lot more attention to risk.”)

There are so many more topics that I could have covered here – like FVA, CVA, or that bubbles seem to be driven by increasing testosterone levels in dealers, but I will leave it for now.

After three days of risk management facts and opinions, I was on the verge of information overload, but I am definitely going back next year. For the risk “lover”, this conference is a treat.

I hope to see you there next year! In the meantime, if you have any questions about risk or if you’d like to discuss these topics in more detail – let’s chat. Email me to ask questions about SAS risk management or you can talk with me, my colleagues and other risk peers via the comments section of this post.

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One Comment

  1. Waynette Tubbs, Editor
    Posted December 29, 2011 at 5:01 pm | Permalink

    Anders’ reference to the intriguing research about bubbles being related to testosterone levels in traders was presented by Dr. John Coates, a research fellow at the University of Cambridge.
    Great post Anders. I would love to attend RiskMinds – perhaps in 2012?

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