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Systems Risk"Systems Risk" is in the position that Operational Risk was a decade ago (pre Basel II) in that everyone knows that Information Technology is a major issue in Financial Services but the industry has not found satisfactory ways of analysing and measuring the associated risks. Many business surveys point to IT being of vital interest to Boards and senior management, but we (the IT profession) keep screwing up - I would argue because, in part, neither the IT function nor business has yet learned how to manage risk. August 29, 2010 I cannot tell the truthWhat would George Washington make of Wall Street? Continue reading "I cannot tell the truth" Posted by Patrick McConnell at 01:50 AM | Comments (0) February 12, 2010 Is Wall Street Nuts?"Men are moved by two levers only: fear and self interest" - Napoleon Continue reading "Is Wall Street Nuts?" Posted by Patrick McConnell at 12:42 AM | Comments (0) January 30, 2010 Risk Managers' Haiku
Something bad's happened
* Haiku is a Japanese poetry form in which a concept is encapsulated in 17 sounds/syllables, typically in three lines of 5, 7 and 5 sounds. See also the Risk Managers' Job Description Posted by Patrick McConnell at 12:42 AM | Comments (0) January 10, 2010 The Inefficient Market Hypothesis"One Investor does not a Market make": Proverb (updated) Continue reading "The Inefficient Market Hypothesis" Posted by Patrick McConnell at 06:53 AM | Comments (5) December 31, 2009 The Strangely Silent SupervisorAnnouncing bad news on the day before a public holiday is a favored ploy of grubby governments and politicians. Now banks are doing it too! Continue reading "The Strangely Silent Supervisor" Posted by Patrick McConnell at 04:21 AM | Comments (0) December 18, 2009 FSA - FSAin't!Bart Simpson: "I shouldn't let this bother me. It's my job to be repetitive. My job. My job. Repetitiveness is my job". Continue reading "FSA - FSAin't!" Posted by Patrick McConnell at 01:25 AM | Comments (0) December 12, 2009 Basel to go High Tech?'A journey of a thousand miles begins with a single (mis)step' Chinese philosopher Lao Tzu (abridged). Continue reading "Basel to go High Tech?" Posted by Patrick McConnell at 05:31 AM | Comments (1) December 08, 2009 How much is a Risk Manager worth?In the wash up of the Global Financial Crisis, the Australian Prudential Regulation Authority (APRA) has become one of the first prudential regulators to formally announce new rules on the governance of risk and remuneration for the directors and management of banks and insurance companies. APRA's new rules require that financial institutions have a 'Remuneration Policy [which must be approved by the Board] that aligns remuneration and risk management'. APRA leads the supervisory field by demanding that regulated banks ensure that 'the performance-based components of remuneration must be designed to align remuneration with prudent risk-taking'. [Note the emphasis on 'prudent', how will that be measured?] Under the new rules, performance-based components of risk-takers' remuneration must incorporate 'adjustments' to reflect not only the risks taken, actual outcomes and the time for risk outcomes to emerge, but also 'the cost of the associated capital'. In effect there must be some form of 'Risk Adjusted Performance Measurement' (RAPM), such as RAROC (Risk Adjusted Return on Capital). Without detailing in any way how risk-adjusted performance is to be measured, APRA requires that remuneration policies must cover senior management and risk takers, whose 'activities, individually or collectively, may affect the financial soundness of the institution'. [In practice a lot of (very powerful) people]. Of interest in this forum, is that the regulator requires that new policies explicitly cover remuneration for 'risk and financial control personnel', ensuring that remuneration of risk management staff does not 'compromise the independence of these personnel in carrying out their functions'. The new rules dictate that the Board Remuneration Committee must have 'free and unfettered access to risk and financial control personnel and other parties (internal and external) in carrying out its duties'. [Note that for insurers, APRA includes Actuaries in its definition of 'risk and financial control personnel']. Risk Managers will have, at least, three roles in implementing the new policies. First, the risk management function, led by the Chief Risk Officer (CRO), will have to take the lead in developing RAPM methodologies and ensuring that they are understood and approved by the Remunerations Committee and senior management, as part of the firm's overall Risk Management Framework. Secondly, and potentially more treacherous, risk managers will be forced to make judgments on individual business managers as to their risk management behaviors. In practice, normal events, such as risk limit breaches, will gain enormously in importance, as the resolution of such events will impact on the evaluation of a risk-taker's adherence to risk policies. Expect more blowback from business! Last, risk management professionals will have to be rewarded on a basis that is independent of the performance of the businesses that they serve. What will be the rules for remunerating risk professionals under new rules? Obviously the occurrence of a risk event, or not, is not a valid measure. If a risk manager estimates that a firm will probably incur a particular loss once every year, say, and nothing happens: is the risk manager good, bad, or just lucky? Reward for risk managers, in such a new regime, must be based not only on risk assessment abilities but also on softer skills such as their ability to improve the 'risk culture' of the firm overall. Since risk culture is extremely difficult to measure, influence on changing culture will probably be impossible to measure. So what makes a good risk manager? Professionalism will be important. How risk managers conduct themselves, with clients, colleagues and potential adversaries will be important to any evaluation of their contribution to a firm's risk culture. PRMIA's Standards of Best Practice, Conduct and Ethics, is a good starting point for evaluating adequate levels of professionalism but will probably need expansion going forward. Lastly, knowledge and experience will be essential. Risk managers gain a 'feel' for risk though exposure to risk making decisions, both good and bad. Difficult to measure but essential to evaluation, experience 'in battle', and the ability to use that experience productively, will become a key determinant of a risk manager's 'worth'. APRA is the first regulator into print, but one only has to pick up the financial press to see that similar rules are on their way, everywhere! Who will Boards turn to when the issue of risk-adjusted performance is tabled? The first port of call will be Human Resources, of course, but Risk will not be far behind. What will the risk profession do when the question is asked? I suggest that 'don't know' will not be a satisfactory answer! There is a need for risk professionals to think about these issues as a matter of some urgency and one of the first questions to tackle is 'How much is a Risk Manager worth?' Posted by Patrick McConnell at 04:05 AM | Comments (1) November 26, 2009 Spare the Rod, Spoil the Child!"Speak softly and carry a big stick" Theodore Roosevelt Continue reading "Spare the Rod, Spoil the Child!" Posted by Patrick McConnell at 05:32 AM | Comments (2) October 28, 2009 Regulators - Below Par? No!'The difference in golf and government is that in golf you can't improve your lie.' George Deukmejian, US Politician Continue reading "Regulators - Below Par? No!" Posted by Patrick McConnell at 04:16 AM | Comments (0) October 13, 2009 Too Big to Succeed - Too?'The larger and more authoritarian the organization, the better the chance that its top decision makers will be operating in purely imaginary worlds': Oliver E Williamson, Nobel Laureate 2009 Continue reading "Too Big to Succeed - Too?" Posted by Patrick McConnell at 09:59 AM | Comments (0) October 11, 2009 Too Big to Succeed?Oscar Wilde: 'Nothing Succeeds like Excess' Continue reading "Too Big to Succeed?" Posted by Patrick McConnell at 02:48 AM | Comments (0) October 10, 2009 100 Fathers'Success has 100 Fathers, but failure is an orphan': Proverb Continue reading "100 Fathers" Posted by Patrick McConnell at 02:11 AM | Comments (1) September 18, 2009 The Heffalump in the Room"Help, help, a Horrible Heffalump, cried Piglet, It is awfully hard to be b-b-brave, when you are only a Very Small Animal": A.A. Milne Continue reading "The Heffalump in the Room" Posted by Patrick McConnell at 07:06 AM | Comments (0) September 09, 2009 Basel II - Redux"We come not to praise Basel, but to bury him" Continue reading "Basel II - Redux" Posted by Patrick McConnell at 03:21 AM | Comments (2) |
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