Risk management – the new mantra

Just came out of the main plenary session with Herbert Stepic, CEO of Raiffeissen Bank saying how great Central and Eastern Europe and Russian banking is doing, followed by Martin Wolf, Editor of the Financial Times chairing a panel on how sh*t American and European banking is doing.

This followed a lunch with guys from Asia saying that Asia is hot, hot, hot.  And that's nothing to do with the weather. 

The whole thing concluded with a chat with a SWIFT guy about why don't Sovereign Wealth Funds (SWF) just create a new bank and take over the world.

Nice thought, e.g. if Abu Dhabi Investments Authority can become the biggest shareholder in Citibank, why don't they just buy Lehmans and a couple of others, or their staff, and take over?

This is a critical discussion as, right now, those with capital can wipe the floor from those without and whose got capital?  SWFs, the BRIC economies, and those who weren't wrapped up in the massive subprime market fiasco we are all now trying to recover from.

Meantime, a discussion started as part of this thoughtstream that built upon the discussions in Nice last week at the Eurofi meeting (see Friday's blog). 

This is that we need a globally co-ordinated, regulatory supervisory framework.

Certainly, this came out as part of today's plenary and also last week.

The idea is simple.  Banks must prove adequate capital to cover liquidity risks.  However, you cannot measure and manage liquidity risks without some form of global monitoring.  Equally, if you have securitisation going out of the banking industry, into insurance for example, then that needs covering too. 

How this might be achieved is through the Basel Committee, BIS, Financial Stability Forum and regional and national regulators, all working in a co-ordinated whole to focus upon systemic risk and liquidity risk.

For banks, this means that risk management will be the new mantra, with Bill Rhodes (CEO, Chair of Citibank) and David Hodgkinson (COO, HSBC) both saying that the Risk Management function now needs to report directly to the CEO and the Board of the Bank.

Question: why didn't it have that function in many banks before?

Question: why is it that Risk Management is often over-ruled by Lines of Business?

Question: how can a Risk Manager say 'this will kill our business' and yet he or she can be over-ruled by the CEO.

I only ask these questions because there are several banks in public domain being questioned about their policies over the last year in the sub-prime crisis where I know:

a) that their Risk Management function hid inside the bowels of compliance and operations;

b) were often over-ruled by the business leadership who saw profit and shareholder returns being of far more importance than risk avoidance, capital adequacy and liquidity management; and

c) even if they could prove (b) were over-ruled by egomaniacal CEO's (no names mentioned).

The day risk avoidance becomes more important than profits and shareholder returns is the day that I eat my new Federal Reserve baseball cap.