Where Risk Meets Strategy
Getting risk management right in the next 12 months will be crucial for the financial industry, said Bruce Fletcher, chief risk officer, UK Banking, HSBC Bank, now that the industry has come through the crisis sufficiently to reassess risk management. Speaking at a Financial Times event entitled ‘Lessons Learnt from the Financial Crisis’, Fletcher outlined the new role of risk management in light of the financial crisis – and who ultimately needs to be responsible for the function. “We have only had 18 months to reassess the problems. Now it is about getting the right people, policies and routine in place over the next 12 months,” he said.
Richard Bartholomew, head of risk management, Europe, Middle East and Africa (EMEA) at Northern Trust, said the crisis had emphasised that risk needed to assume a yet more strategic importance in firms, despite the absence of complete information available in mapping risk. “None of us have the perfect information,” he said. “Risk needs to be brought back to the heart of decision-making. We in risk management need to bring our influence to bear. We need to try to understand the direction the company is going and have right of veto.”
Exploring the topic of lessons learnt from the crisis, one audience member suggested that the guidance and discussion had been “largely aspirational” and asked how the sector can move forward on risk management. Northern Trust’s Bartholomew responded that the financial sector’s subsequent re-evaluation of the role of the risk manager is already noticeable. “It is much easier to be a risk manager now. There has been a fundamental change in the risk culture,” he said. “But there needs to be a partnership [between the risk manager and the board] otherwise you move too far towards conservatism. You can’t regulate out uncertainty – the risk function exists to manage the risks that arise from it – and over-regulation has the potential to regulate out diversity.”
Brandon Davies, chairman of the Audit, Risk and Compliance Committee and managing director of the Risk Academy, Global Association of Risk Professionals (GARP) agreed that integration between the board and risk department is needed to better manage risk – and warned that proposals for separating the two would in fact be detrimental to a company’s business. He said it also had a longer-term effect: “[Integration] is changing the whole way board members interact with each other and the way boards are structured,” he said, adding that proposals by the Financial Services Authority (FSA) to create a separate board within firms to analyse risk would be counterproductive. “Liquidity risk is fundamental to the way we understand and describe risk. Risk officers can’t just get away with being a good quantitative analyst anymore. They need to interact with the board,” said Davies.
Another asked whether the credibility of the risk manager had been affected by the recent trend towards overstating risk. HSBC’s Fletcher responded: “Yes. Neither over- or under-stating risk is desirable. The goal is to be as accurate as possible.”