In March, the Economist Intelligence Unit conducted a survey of risk executives and found that firms had slowed in their progress on revamping and strengthening risk management. I believe that it may be too early to draw specific conclusions – based on this survey’s results – as to where the industry is headed with regard to dealing with its risk management challenges. But the survey does raise the general question of whether there may be a leveling out of the drive – and interest – over the last couple of years toward improving firm-wide risk management practices.
GARP has seen a number of very positive changes in risk management around the world during the last 3 to 4 years. Without the crisis, these changes may have never happened, or would have taken many more years to develop. There is still a long way to go. We just hope that in the drive for increased profitability in this very low interest rate environment the lessons learned from the crisis do not fall by the wayside.
The profession of risk management (and risk managers) is dealing with some of the biggest issues in the history of financial services – with no proven roadmap on how to move forward. Right now risk managers are under considerable pressure: They have to deal with increased domestic and global regulatory uncertainty; intensified regulator assertiveness, with no clear end in sight; and new questions almost daily.
Today’s complex risk landscape
It’s now universally recognized that – given the interconnectedness of the markets and other factors – risk can crop up instantaneously from anywhere around the globe causing increased volatility and uncertainty and increasing the pressure on risk managers. This uncertainty increases their need for accurate data and the need to ensure that in their decisions they take into account a variety of issues and alternatives. Consider the following six factors that have increased relevance since the crisis:
has recently come forcefully to the forefront. With the increasing complexity of transactions, the global nature of the markets and the risks they represent, it’s no longer uncommon for firms to have chief operational risk officers. Only a few years ago the position did not exist.
Models and their role
have become a focus, leading to a number of questions with no easy answers. For example, given the capital issues that were the result of the crisis, should we really continue to rely on a firm’s proprietary models? Do we need public sector models, especially since it’s been shown that in the event of a failure – especially that of a systemically important financial institution – the public sector may be asked to pick up the pieces?
Systemic risk issues
are dominating the regulatory discussion globally, take up a considerable amount of the risk manager’s time, and raise very complex risk-related questions. For example, should the balance sheet size of a systemically important institution or environmental issues such as sovereign risks, be included in a firm’s modeling scenarios not only to specifically measure the effect of each on the firm, but also how each may affect systemic risk?
is another area of importance. Capital charges and efficient use of capital have been and will be a major area of focus for risk managers well into the future.
is also of growing interest to risk managers. For example, risk managers are now being involved in corporate discussions about compensation, and in some cases actually being asked to opine on compensation packages and whether the incentives built into the packages may increase the firm’s risk profile.
The Board of Directors’ role
has changed dramatically over the last few years, with risk-related issues becoming more important to directors. This is not only because directors are being held to a higher standard of conduct, but also because they now want to objectively show and ensure they are carrying out their duties to their companies and shareholders properly. Directors are also demanding that a culture of risk awareness exists throughout the organization, and that risk awareness becomes and remains an integral part of the company.
Today’s risk managers
We’re also seeing the risk function being asked to take on a role not envisioned in the past. Risk managers must become great communicators and take pains to develop and add that ability to their skill set. They are now being asked to undertake lead roles in dealing with regulators, and have become indispensible in explaining the effect of regulatory change on a firm and expressing the company’s view about new or pending regulatory initiatives.
Risk managers in many firms are also taking on a quasi sales role, augmenting company sales activities by acting as an “independent” counselor, explaining the risks associated with certain transactions to investors and providing insight into a firm’s infrastructure and its ability to deal effectively with the risks associated with a specific transaction or portfolio of activities.
Over the last few years the role of the risk manager has increased in importance globally. But, there’s still a lot of room for it to grow and for risk management to become an even more integral part of a company’s daily thought process. Risk managers now are taking their place among company senior management teams and being integrated into many firm’s strategic planning processes. But, there are challenges ahead to keep the momentum going – and very few easy answers.