I am over in Geneva at the moment (taking a break from the harsh English winter?..) for the RiskMinds 2010 event. Despite its slightly pretentious title (I leave it to you to assess how appropriate the name seemed in 2008…) it is one of the best attended risk management events where risk managers discuss what is going on and what is new to risk management. You can find some posts from the 2009 event here, and the 2008 event here – both make interesting reading given that we are out of the crisis now (aren’t we?).
I arrived late for the first day, just to catch a panelist Pippa Malmgren of the Canonbury Group saying that during the crisis everyone knew they were long highly leveraged, very risky assets that were potentially in a pricing “bubble” but when asked about whether this bubble, most used one of the three responses:
- Asset managers said it didn’t matter so long as all of our peers go down too…
- Hedge fund managers said that there business was to surf market waves and they could restart the fund afterwards anyway…
- I know it’s a bubble but I will be able to get out before it bursts…
Pippa added that the last was the most worrying response, although I guess all are still relevant negative insights into the attitudes of some financial market participants.
The next panel was on Risk Culture & Ethics with Richard Evans of Citi first up presenting on issues resulting from the crisis. Richard suggested that the following key issues were missed during the crisis:
- Silo Mentality – Risk reports were not comprehensive enough, covering all assets, regions and business units in one; risk management focussed too much on validating individual deal flow (transactions) rather than the portfolio; there were no incents for business managers to share resources and information.
- Short Term Revenue Focus – Focus was on short-term bonuses were not related to profitability after costs and cost of risk capital were taken into account.
- Backward-Looking Models – Models looked backwards (historic VAR for instance) rather than being forward-looking, scenario-based. Richard said that Citi now combine both backward-looking VAR and multiple (severe) scenarios on an approximately 50-50 basis when assessing overall risk now.
- Poor Teamwork – Trading and risk management staff did not work together effectively during the crisis. Richard now suggests this must be addressed through greater involvement of the business in risk management, the introduction of the risk committee and fighting against risk management “ivory towers”.
- Board Weakness – Richard said that boards and senior management committees were not set up to react to “alarm bells” such as triggers resulting from limit breaches; Also many boards were simply very weak in their basic understanding of the risks being taken by the business.
I don’t think the above will come as any surprise to anyone who has followed the crisis but Richard is a good speaker and so his presentation was entertaining. He later went on to criticise regulators for asking him to replace staff members with 20 years experience with others with 20 years experience – he said that he had not yet found a way to cram 10 years experience in 2 years although maybe recent times have come close to this aim! He also said that firms where the “mood” of the CRO affected what approval decisions were made obviously did not have strong enough governance in place. Richard wants risk and trading staff to work closer together, although he admits that two years on it is difficult to get business level compensation to get traders to work in risk – in this regard he also mentioned his days at JPMorgan when trading and risk staff spent time seconded to the regulators for a time.
There were a variety of other speakers during the day, all dealing with risk governance and culture. Whilst vital to the changes that must be made in the culture of the majority of institutions, I think it is a difficult topic to talk about, since it is hard to express just what needs to be “done” in some pragmatic way. Put another way, the conversations on this topic tend to focus on the need for a risk management culture and become very wooly when discussing how one is implemented. A presentation by Alden Toevs of the Commonwealth Bank Australia attracted discussion by some of the attendees over coffee. The presentation was about how to formalise/make a process of the discussion and agreement of risk appetite (a Risk Appetite Statement) between board, risk management and the business. Alden suggested that the use of anonymous “voting” technology at board level encouraged more openness and discussion, and getting the business involved in this process was a great way to encourage the involvement of trading in risk management. A good presentation in both content and effects (an iMac user I think!) and an amusing speaker who pointed out that visiting the Australian parliament is interesting for a risk manager given that you are surrounding by genuine Black Swans in the lake outside…