There is a clear difference between big I-banks that recorded massive losses stemming from the subprime mortgage-lending crisis, and those firms that have been able to avoid this calamity. – Risk Controls
On Wall Street, it is true that you have to take risks to make money, but excessive risk-taking can also turn into financial dynamite.
The recent market crisis has provided a real-life test of risk controls. Unfortunately, many firms have scored failing grades.
As the level of sophisticated trading products expands and capital markets continue to become more complex and interconnected. This growing trend, coupled with the need to ensure a healthy balance in risk taking, requires strong firm-wide risk controls.
Examples of firms with strong risk-control cultures include Goldman Sachs, Lehman Brothers and Credit Suisse. They were able to minimize their financial exposure to this subprime market debacle.
The common characteristics of these risk-focused firms include board participation in setting corporate risk appetite and tolerance, committee participation and active involvement in risk-related questions and concerns.
These firms require adherence to company-stated risk-management policies, procedures and controls. Such risk policies and controls are also frequently updated to reflect changes within the companies and to insure that policies are not easily circumvented.
These firms understand that effective risk management requires that risks be evaluated and understood prior to deciding whether to take them.
Risk managers at these firms are not viewed as traffic cops who are asked only to show up at the accident scene. Their risk concerns are never just dismissed.
Risk controls in such firms are built on the principle that risk management can provide valuable insights prior to taking on risk, and accurate monitoring once bets have been taken.
Firms that have not been able to fully understand the risks that they are taking on have experienced devastating financial losses. Many of these I-banks (e.g., Merrill Lynch, Citicorp, UBS AG, Bear Stearns and Morgan Stanley) shared a common characteristic--they had weak or lax risk controls.
Many of these firms entered into the mortgage derivatives business without a full understanding of the level of risk actually being taken, or if they did understand it, they simply ignored the risk in the pursuit of lucrative bonuses. For such firms, these actions were a deliberate failure to adequately control risk--from the board level on down.
Until these investment banks fix these fundamental risk-control problems, including the lack of strong board and risk-management oversight, many remain vulnerable to future losses. Several of these firms have already begun to overhaul their risk-management functions, but this is only a first step.
As more information about the level and types of control failures come to light, we can reasonably expect that shareholder and regulatory pressure will also help to make sure that these lax firms move swiftly to correct their control deficiencies.
Go to Article from Forbes »
On Wall Street, it is true that you have to take risks to make money, but excessive risk-taking can also turn into financial dynamite.
The recent market crisis has provided a real-life test of risk controls. Unfortunately, many firms have scored failing grades.
As the level of sophisticated trading products expands and capital markets continue to become more complex and interconnected. This growing trend, coupled with the need to ensure a healthy balance in risk taking, requires strong firm-wide risk controls.
Examples of firms with strong risk-control cultures include Goldman Sachs, Lehman Brothers and Credit Suisse. They were able to minimize their financial exposure to this subprime market debacle.
The common characteristics of these risk-focused firms include board participation in setting corporate risk appetite and tolerance, committee participation and active involvement in risk-related questions and concerns.
These firms require adherence to company-stated risk-management policies, procedures and controls. Such risk policies and controls are also frequently updated to reflect changes within the companies and to insure that policies are not easily circumvented.
These firms understand that effective risk management requires that risks be evaluated and understood prior to deciding whether to take them.
Risk managers at these firms are not viewed as traffic cops who are asked only to show up at the accident scene. Their risk concerns are never just dismissed.
Risk controls in such firms are built on the principle that risk management can provide valuable insights prior to taking on risk, and accurate monitoring once bets have been taken.
Firms that have not been able to fully understand the risks that they are taking on have experienced devastating financial losses. Many of these I-banks (e.g., Merrill Lynch, Citicorp, UBS AG, Bear Stearns and Morgan Stanley) shared a common characteristic--they had weak or lax risk controls.
Many of these firms entered into the mortgage derivatives business without a full understanding of the level of risk actually being taken, or if they did understand it, they simply ignored the risk in the pursuit of lucrative bonuses. For such firms, these actions were a deliberate failure to adequately control risk--from the board level on down.
Until these investment banks fix these fundamental risk-control problems, including the lack of strong board and risk-management oversight, many remain vulnerable to future losses. Several of these firms have already begun to overhaul their risk-management functions, but this is only a first step.
As more information about the level and types of control failures come to light, we can reasonably expect that shareholder and regulatory pressure will also help to make sure that these lax firms move swiftly to correct their control deficiencies.
Go to Article from Forbes »
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