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Risk management needs to go through fundamental changes

The corporate culture of growth at any cost during the past decade has exposed fundamental flaws in the way banks conducted their business and in particular how they managed it. As such, the financial crisis has highlighted the need for dramatic changes and a move towards an enterprise-wide approach to risk management.

 

While banks may have had proper risk management systems in place, the prevailing atmosphere was of fast growth and fast-track treatment for risky deals with some serious errors in risk analysis. In order to get lending activities back on track, the Bank of England recently decided going down the untried route of quantitative ease, effectively printing money in exchange for high quality assets. However, the UK market does not have any experience of how this will work. We only need to look at Japan, which in the 1990s went through its “the lost decade” to see that simply increasing money supply is no guarantee of a quick turnaround. As such, I believe there are more efficient steps that banks can put in place to reduce risk within lending.

 

Rather than blame individuals, we must look at the flaws in the entire risk management system. Banks must now switch to an enterprise-wide view of all operations rather than the siloed approach to risk management that contributed to the current crisis. This means applying technology at a business level rather than in isolation. As such, banks need to review processes and systems that can streamline administration and help achieve operational excellence.

 

Having an enterprise-wide risk management system in place, coupled with appropriate data capturing tools will make the firm less dependent on people, reducing the risk of human fallibility as well as increasing transparency and auditability. This approach might offer an efficient solution to provide banks with a comprehensive overview of their lending portfolios, consequently reducing the risk of their lending activities.

 

Mikael Krohn, VP, EDB Business Partner UK

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Comments: (5)

A Finextra member
A Finextra member 02 April, 2009, 00:39Be the first to give this comment the thumbs up 0 likes

I disagree.

That means relaying more on tools designed by some other people. Who controls them?

Rating companies were used exactly as such a tool - external risk assessment. Results are visible and painful.

What is needed is a change in cultural behaviour - responsibility toward client first resulting in a possibility to earn a lot, but also possibility to lose everything, including the whole pension pot!

Only then customers will believe again in their agents. Till then no system will be able to replace lost confidence.

A Finextra member
A Finextra member 02 April, 2009, 10:56Be the first to give this comment the thumbs up 0 likes

If someone compiled a list of these articles, such as this one below, it would become quite obvious that a lot of fundamental changes in risk management and credit ratings must take in place. These processes and systems are useless and actually quite dangerous the way they are.  

September 27, 2007

Moody's says no subprime-style crisis on cards for UK

"LONDON (Reuters) - UK banks do not face the prospect of a crisis like that seen in the U.S. subprime mortgage market, analysts at ratings agency Moody's Investors Service said on Thursday.

 

They told investors on a conference call that the UK mortgage lending sector has the ability to withstand a potential downturn in asset quality and it continued to have solid financial fundamentals.

"We ... do not believe that a U.S. subprime-like crisis for the banks is about to happen in the UK," said Adel Satel, team managing director at Moody's for banking."

 

Elizabeth Lumley
Elizabeth Lumley - Girl, Disrupted - Crayford 02 April, 2009, 11:13Be the first to give this comment the thumbs up 0 likes

Systems, technology and data management are all well and good, but they mean nothing and are worth nothing without proper business practice behind it.

The current crisis was caused (and won't be solved) by having more efficient data capture and ERM systems in place. (as nice as those systems may be) Risk management, led by people and senior managers, need to be allowed and encouraged to become involved with business decisions from start to finish.

The easy, 'close-my-eyes-and-it-will-go-away' solution would be to listen to software firms and consultants who try and sell you a wonderful ERM system that will solve ALL your problems. No bit of technology is going to solve your problems because the issues lie in relationships and communications with real people and business groups.

No problem will be solved until risk managers are given the back up to be involved with the trading floor on an day to day basis.

A Finextra member
A Finextra member 04 April, 2009, 05:45Be the first to give this comment the thumbs up 0 likes

I'm sure there's been plenty of risk measuring going on but somehow risk escaped the management. There-in lies the problem.

Poor mangement created systems where risk was ignored and risk-taking/ignoring was rewarded.

A Finextra member
A Finextra member 08 April, 2009, 10:04Be the first to give this comment the thumbs up 0 likes

I don't disagree that a sound culture and professional individuals are the most important assets for any bank. However, history has shown that the culture has a tendency to change and in a combination with de-regulations the banks have failed their mission with widespread consequences for the society. Unfortunately the culture has now changed to a degree where the banks seem to be traumatised. There is no doubt that the political leaders will impose stricter regulations and supervision. With the right approach and tools I know that it is possible to implement, for example, Basel II IRB and achieve considerable efficiencies, in addition to quality and transparency – all of which are greatly required in the present market.

Mikael Krohn

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