CRO Q&A
The Changing Face of Risk at Today’s Global Financial Institutions
To foster understanding of the evolving nature of the risk
function, Robert Iommazzo from SEBA International engaged
in a series of interviews with top risk executives ranging from
a broad set of global financial services institutions inclusive of
commercial and retail banking, investment banking, interdealer
brokerage, wealth management and reinsurance. While diverse
both in product and geographic scope, all share one thing in
common: a strong performance in managing risk during the
recent financial crisis.
Question: How has the financial
crisis changed the way you focus
on risk?
Raj Singh, Chief Risk Officer, Swiss Re: It’s
changed in many different ways. One thing
we are definitely looking at is models – the
quantitative plus qualitative aspects – and
really questioning their assumptions a bit
more. Another that really is being challenged
is extreme risk or tail risk, which is what we do
in insurance and reinsurance. In reinsurance
we primarily use tail VAR to measure risk, but
also having an understanding of the extreme
scenarios.
James Stewart, Chief Risk Officer, The
Bank of Butterfield: Operationally, there
has been a significant amount of emphasis
on extreme events, and along with it a
tremendously increased emphasis on stress
testing and all the related infrastructure that
comes with it. There is increased emphasis
on safety, soundness, and liquidity and the
flight to quality at a jurisdictional level. It
has completely changed the way that banks
manage their balance sheets, particularly
with respect to funding structures. There is
an increased emphasis on liquidity trending
toward a more conservative bend among
regulators. This has an impact on earnings,
but at the end of day your earnings … along
with safety and liquidity… are part of the
picture that your stakeholders are looking at.
Lionel Lopez, Chief Credit Officer, National
Australia Bank: In my observation, risk
has remained much the same before and
throughout the crisis. Risk is all about
common sense; it is about understanding the
impact of your activities. I think one of the
main issues behind the crisis was that a lot of
people just didn’t understand the impact of
what they were doing.
Question: What are the most
pressing challenges for risk
executives today?
Stephen Anderson, Chief Risk Officer,
Europe, HSBC: The challenge for risk
executives now is to evaluate risk across the
whole suite of risks an organization faces
and to be less of a transactional approval
function, and more of an enterprise risk
management function, looking at not just their
traditional market risk and operational risk,
but also pensions risk, insurance risk, and
strategic risk.
Hervé Geny, Chief Risk Officer, ICAP:
Liquidity risk has taken on a life of its
own. We’re redesigning all our policies,
procedures, and methodologies for
measuring liquidity risk and setting up
limits against liquidity. Business continuity
planning is also clearly a challenge.
Raj Singh: Risk measurement and
methodology need a lot of attention because
of the whole change in the data, especially
on the financial risk side. The second
element in our focus is to make sure that
large transactions where we take significant
exposure get the right attention of the right
expertise, including the independent sign-off from risk. The third area would be risk
infrastructure. Last, but not least, would be
the focus on talent, because probably in this
crisis talent and experience have helped us
more than the systems.
Question: Is there a further
need to strike the right balance
between qualitative and
quantitative measures within
risk? How do you see the future
application of risk models?
Stephen Anderson: Models and quantitative
methodologies for assessing risk are and
will remain incredibly important, and as the
technology evolves to where they can be
used in other areas of risk management,
their role will actually increase rather than
decrease. However, what has to evolve
alongside that is an understanding of the
limitations of any one model, or of the generic
limitations of models, and of the role of
judgmental overview or judgmental analysis.
Hervé Geny: At ICAP, we do not use purely
quantitative methodologies, but tend to put
our efforts on scenario modeling and trying
to understand what can happen in any
particular business and how the events are
linked to each other, so the type of scenarios
we are looking at are things that take in
to account more than one risk. As we go
through the scenarios with the businesses
we understand better where the risk falls so
we can put the right controls around this risk.
I think risk models are going to evolve into
more of a mix of quantitative and qualitative
methods.
James Stewart: Models can be very
effective in terms of managing capital
and dealing with more sophisticated
stakeholders, but they tend to pose a
number of challenges in conveying a view
of risk that is easily understood by people.
When we report to the Board, we use both
qualitative and quantitative expressions
where appropriate, but I have found that
the qualitative expressions lend themselves
