Tuesday, June 8, 2010
A. A positive corporate culture
No one can manage risk if they are not prepared to take risk. While individual initiative is critical, it is the corporate culture which facilitates the process. A positive risk culture is one which promotes individual responsibility and is supportive of risk taking.
B. Actively observed policies and procedures
Used correctly, procedures are powerful tool of risk management. The purpose of policies and procedures is to empower people. They specify how people can accomplish what needs to be done. The success of policies and procedures depends critically upon a positive risk culture.
C. Effective use of technology
The primary role technology plays in risk management is risk assessment and communication. Technology is employed to quantify or otherwise summarize risks as they are being taken. It then communicates this information to decision makers, as appropriate.
D. Independence or risk management professionals
To get the desired outcome from risk management, risk managers must be independent of risk taking functions within the organization. Enron’s experience with risk management is instructive. The firm maintained a risk management function staffed with capable employees. Lines of reporting were reasonably independent in theory, but less so in practice
More than you'd want at SelfTan
Several reports support the conclusion that Human Capital Management predicts Stocks that outperform the market . The investment strategy for these portfolios rests on firms making significant investments in formal learning and development. Human Capital Management is an essential core competence (possibly the essential core competence) for organizations.
It appears that Wells Fargo believes that people play a vital role in risk management.
Kerri Grosslight confirms. She's Wells Fargo’s head of risk management and compliance.
And, she's a people person.
“Our mantra has been ‘Risk management is everyone’s responsibility, and now we’re also emphasizing ‘Know your real risk’” she says. "the risks that cross your desk every day. We’re working to help our team members understand that they are in the best position to understand and identify risks because they’re the ones doing the work.”
Full interview at RiskChat
Saturday, June 5, 2010
Copresenter Michael Rasmussen is a leader in understanding risk and compliance standards, frameworks, regulations, and legislation, Michael aims to improve corporate integrity through advancing GRC initiatives.
Copresenter Norman Marks has been a chief audit executive of major global corporations for more than 15 years. He is the contributing editor to Internal Auditor’s “Governance Perspectives” column.
Building a strong risk culture requires significant changes in the bank's management disciplines and value system that are beyond the reach of a CRO acting alone. It is simply not possible to have a strong risk culture unless the CEO makes it happen through forceful leadership.
The CRO cannot be expected to do what only the CEO can do—which is to take the lead in strategic risk-taking, protecting the franchise and building a strong risk culture.
Full piece from American Banker
PRMIA's Thought Leadership event at Fields Institute in Toronto (June 10) features Marcus Cree discussing how the right infrastructural design allows a truly credible culture of risk to flourish.
The new conference agenda for the 7th Annual National Risk Management Conference highlights Embedding Risk Culture and learning how to communicate objectives from the RM team to the Executive
Wouldn'ta seen that in the past!
-- By evaluating, accepting and managing risk in an organized process. Without that organized process, a company’s ability to weigh the expected risks versus rewards on an ongoing basis is ad hoc at best and absent at worst.
-- Strengthened corporate culture: Establishing a proper tone at the top regarding risk can shift an organization from a culture of compliance to a culture of confidence — that is, from an exclusive focus on controls to an atmosphere in which employees can confidently choose, based on thoughtful analysis and strong corporate values, which strategic risks to take, mitigate or avoid. A
-- Improved brand: A well-executed ERM program can help improve a company’s reputation in the marketplace and build trust with customers, strategic partners, rating agencies and regulators by demonstrating to stakeholders a company’s commitment to managing risk for itself, its suppliers and its customers.
When asked about “moral hazard” and what lessons can we learn he said
"In every boom we see examples of failure of ethics. Where governance is weak, and the risk culture poor, individuals either acting alone or in unison will take maximum advantage of that. I have lived through three major market busts. The difference between the failures of 2008-09 and those of 1987-88 was the level of sophistication. You could say the crooks today wear better suits! However apart from the more notable examples I believe culture and governance across the mainstream of our financial landscape stood up pretty well. "
A. A positive corporate culture,
No one can manage the risk, if they are not willing to take risks. While individual initiative is critical, is the corporate culture that facilitates Process. A risk is a positive culture that encourages and supports personal responsibility for risk.
B. Observed active policies and procedures
Properly used, the procedures powerful tool for managing risk. The purpose of the guidelines and procedures is the empowerment of people. They determine how people can achieve what must be done. The success of policies and procedures depends crucially on a positive risk culture.
C. effective use of technology
The role of technology in risk management is risk assessment and communication. The technology is used to quantify or summarize other risks, as they are. Then communicate this information to decision makers, where appropriate.
D. independence or risk management professional
For the desired outcome of risk management, risk managers must be independent of risk-taking functions within the organization. Enron's risk management experience is instructive.The company runs a personal risk management function with capable employees. The reference lines were reasonably independent in theory but not in practice
Institutional investors have been hit particularly hard by the 2008-2009 crisis. Their cumulative losses total hundreds of billions; many lost more than 25 percent of their assets under management.
Just as important, the crisis provided a sobering reality check of institutions’ risk management practices. Some deficiencies observed include:
ƒ. Underestimating true risk exposure across portfolios
ƒ. Failing to articulate how much risk and the types of risks the institution is willing to
include in its portfolios and the market conditions under which it will do so
ƒ. Designing investment processes in which risk management input is an afterthought
ƒ. Underinvesting in building capabilities in the risk management group and using a governance
framework that does not give teeth to the risk management group
ƒ. Missing the opportunity to develop a truly effective risk management culture across the organization when market conditions were more favorable.
Read whole white paper here....intended to encourage discussion
The BNP Paribas Risk Academy, a transversal Group initiative, supports this ambition. The BNP Paribas Risk Academy is an open, group-wide offering, sponsored by the Bank's Executive Committee, and involving all business lines and functions.
Designed for the benefit of all staff and organised around a participative and flexible framework, the BNP Paribas Risk Academy has the following main objectives:
- Drive the continuous dissemination of the Group's risk culture
- Promote risk management training and professional development
- Facilitate the Bank's risk management communities of practice
I think we can all agree that they need a Sim. Meanwhile, in its initial stage, the BNP Paribas Risk Academy offers the following products and services to Group staff:
- The Core Risk Practices, fundamental principles which are the unifying theme of the Risk Academy and promote sound risk management
- A Risk Awareness e-Learning module, which provides an understanding of the essentials of the different risks managed in the Group
- A Risk Training Catalogue referencing risk courses dedicated to professionals engaged in risk-related activities throughout the Group
- An on-line Library, gathering in one place all risk-related documents and aiming to facilitate knowledge sharing
Tuesday, May 4, 2010
Organizations with a strong management of risk culture, such as United Parcel Service (UPS) quickly redirected air freight bound from Asia to Europe to Istanbul and then loaded it onto trucks for delivery to its final destination.UPS was one of the exceptions as most sat and wondered when the ash would blow away and aircraft would resume flying.
Without risk, there is no reward or progress, but unless risk is managed effectively within an organization, the opportunities will not be maximised and the threats minimised.
Read the article here
Risk culture refers to whether the organization embraces and uses risk management as part of strategy-setting and decision-making at all levels of the business. A number of companies fail or have severe difficulties because they had good processes but risk culture problems
-- risk managers going unheeded and even being fired for their bad news
-- failures to communicate risk levels to senior management and the board
-- A short-term drive for profits and bonuses trumping consideration of risk.
Norman Marks posts a list of high level questions that can be used to assess the risk management process on his blog.
BP's story is a parable for the financial industry.
The efforts of BP CEO Tony Hayward to instill a new strict safety and controlled risk culture in his global organization are forever dwarfed by the spewing crude of 5,000 to 10,000 barrels per day into the Gulf of Mexico close to the U.S. shores.
Sir John Brown was a glitzy dealmaker moving BP to the major leagues from nearly nowhere to the global oil & gas independent with the rapid acquisition of Amoco and Arco. However, he never integrated the new entities into a strong safety and risk conscious operation, but went just for deal and profit. The fire at the Texas City refinery ended his reign.
Now, Tony Hayward will be remembered for the Gulf disaster. BP may fall. Neil Perry of Morgan Stanley has foreseen with his analysis of BP "might not be here in a couple of years". The potential damages rise per day in the billions and - in case the crude enters the Gulf Stream - BP can not survive.
Risk....reward. More from GLG on this.
Friday, December 18, 2009
A cynical ad agency exec we know says “They got there money’s worth for years”. For him, what Tiger Woods did or did not do isn’t the point as much as the measurable value of the sponsorship. Is he right? What is Accenture’s vulnerability to the allegations and the recent behavior of Tiger Woods?
You must read Frank Rich's post (written after ours) -- a terrific piece naming Tiger the 'man of the year'. He references Accenture:
Perhaps the most conspicuous player in the Tiger hagiography business has been a company called Accenture, one of his lustrous stable of corporate sponsors. Alas, the many billboards with slogans like “Go On. Be a Tiger” are not so easily dismantled, and collectors’ items like “Accenture Match Play Tiger Woods Caddy Bib” are a growth commodity on eBay.
One would like to assume that Accenture’s failure to see or heed any warning signs about a man appearing in 83 percent of its advertising is an anomalous lapse. One would like to believe that business and government clients didn’t hire Accenture just because it had Tiger’s imprimatur. But in a culture where so many smart people have been taken so often, we can’t assume anything
They built their brand on his shoulders. What does that say about their judgment? Did they vet him appropriately? Worse -- did they know he was what he appears to be – perhaps condone it and align with him anyway? Will their clients continue to associate his face as the face of Accenture now that his mask is off?
Either way, Accenture made four tactical errors in their use of Tiger Woods in their decade-long relationship with him:
1) Accenture made the brand building of Tiger Woods an equal part of their own brand building. When one of these two ships starts sinking, it could take the other down with it. Can Accenture sell ‘high performance’ solutions as its own brand and not as a jointly branded effort?
2) Accenture tied their brand to a living, young celebrity/personality. There’s a reason that some firms use long-deceased icons like Abraham Lincoln or George Washington as brand identifiers. Other firms use animals like geckos or lions as brand identifiers for similar reasons.
3) Accenture failed to see how over-extended Tiger’s brand is, endorsing products for Nike, Gatorade, Gillette, Buick, Titleist, American Express, Rolex, General Mills, etc. If Accenture and Mr. Woods really are high performance players, would an Accenture staffer who wore Nike shoes and a Rolex watch be an even higher performance systems integrator?
4) Accenture has overstayed its joint branding with Tiger by a few years. Had anyone asked “How long should this partnership last?” “When does the risk (and cost) start to outweigh the benefit of continuing this relationship?”
Tying a company’s brand to a celebrity is always risky. Celebrities are human and they suffer the same foibles that you and I do. They get addicted to sex, gambling, food, drugs, etc. They can have bad parents, bad parenting skills, bad kids, etc. They get photographed in unflattering poses, places, etc. Psychology Today succinctly opines on Tiger’s actions as being relatively natural.
Celebrity endorsements are ripe for trouble and few celebrity endorsements can last a long time.
If you sell soda pop it can be damaging. If you sell acumen and judgment it is far worse. Accenture must learn to market and promote itself without the crutch of a celebrity. Accenture needs to make its solutions and abilities (not the golfing industry) sexy and exciting. In his blog, Brian Sommer (ex-Accenture) probes this topic in-depth. High performance is something that potentially exists in all of us. Maybe Accenture can focus more on how they draw that out and bring it to bear on client projects.
Tuesday, December 15, 2009
On a UK blog Schlepp Air is the metaphor to drive the point home.
Sometimes we like risks to be taken seriously. This is a touchy subject in the banking sector right now. These are not great days for the reputation of financial risk managers. Their “value at risk” models first lulled bankers into a false (and perilous) sense of security, but are now causing the financial system to seize up.
Had Brown not been seduced by the siren songs of his exclusively banking sector advisers during the crisis, we would not now face the problem we face today. Brown's utter fiscal ineptitude must now be clear for all to see; why the nation ever permitted this greasy-haired Scots technical college lecturer to meddle with the nation's finances will be a puzzle future generations will not comprehend.
He says that, regulatory reform aside, achieving true risk resilience needs effective risk governance--the structural, cultural, process and accountability improvements that support good decision-making and serve as the foundation of risk management. Only with a strong foundation in place can companies navigate regulatory and economic challenges.
Chris Michel, Hong Kong-based chief risk officer at equity brokerage CLSA Asia-Pacific Markets. In reality, he says, an over-reliance on such mathematical risk models may have contributed to the financial crisis. The perception in the market that the increasing complexity of financial products was matched by increasingly sophisticated techniques for measuring and controlling risks is inaccurate.
Panellists discussed how risk governance and enterprise risk management has been propelled to the forefront in light of the financial crisis. Dennis Lee, chief risk officer at the National University of Singapore said that risk management needs to be embedded as part of "business as usual", and not relegated to a compartmentalised function performed by a few.
Hw says that it is even more crucial now to have independent risk functions -- such as the CRO or entire risk department -- to help management embed a risk culture.
They say that risk management needs to have a prominent place in the overall corporate agenda and be reinforced regularly to have sufficient power to drive the organization. An integrated risk culture will enable companies to assess risks and identify those for which controlling and mitigating actions are most warranted. Companies should also recalibrate incentive structures to ensure rewards encourage behaviors that create long-term shareholder value rather than focusing on the short term. Embedding these processes in an organization will enable companies to more consistently and effectively implement their chosen level of risk tolerance across the enterprise.
Tuesday, December 1, 2009
Risk culture is one arguably the key to achieving enterprise risk management throughout the organisation. However, the declared and desired common values of a risk culture may differ widely from the taken-for-granted assumptions of the
workplace culture and the way that things happen in practice.
The COSO draft risk management framework aims to provide a benchmark.
Our friends at auditteam.org publish in detail against which they can gauge their
own risk management practises.
1. Risk is a double-edge sword – Management in essence must be optimising risk and notv necessarily minimising it.
2. Embedding the risk management framework across the whole organisation in a consistent and meaningful way.
3. Aggregating risk exposures – so that the aggregate risk exposure at the entity level does not exceed the risk tolerance of the organisation.
4. Risk reporting and communication – that is sufficient, regular and adequate
5. Risk management process – to establish which are not working
6. Creating the right risk culture – a set of shared attitudes, values and practices that characterise how an entity considers risk in its day-to-day activities.
7. Learning from risk events – enabling management to stress test their own processes
8. Risk fatigue – Maintaining a heightened sense of risk awareness is, however, easier said than done
9. Reviewing the risk management unit – the right people performing their work in a professional manner.
Thursday, November 19, 2009
Pathology of a Crisis - causes of death: toxic loans.
Actually Mr Dash cites 2 causes :
- poor credit underwriting standards (toxic loans), and
-regulators asleep at the wheel (they saw it but did nothing about it)
However, these are not, Mr Dash, the causes of death of the banks. These are merely the symptoms of the illness.
The cause of death in banking has been the lack of an appropriate risk culture (appetite, tolerance and governance) in the banks and at the regulators.
Until this is recognized as the fundamental flaw in the financial services industry today, then they will go back to doing the same old stuff as before.
Unfortunately, Mr Geithner had his chance to change this, but has listened too much to Wall Street.
A real shame.
Tuesday, November 17, 2009
His article centers on The Greatest Trade Ever, by Wall Street Journal reporter Gregory Zuckerman, who describes John Paulson’s plan to give irrational exuberance an extra boost by directing his banks to originate new CDOs that Paulson & Co. could essentially bet against.
He made no secret of his belief that the CDOs’ subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities, which had been ignored by the rating agencies, Paulson could collect up to $5 billion.
The Greatest Trade Ever doesn't dwell on was an open secret: Everyone knew that subprime lenders aided and abetted mortgage fraud. To my knowledge, the only investment banker who wrote candidly about the subject was Joseph Tibman, who was at Lehman when it collapsed, and wrote The Murder of Lehman Brothers: An Insider’s Look at the Global Meltdown. Tibman believes that as much as anything, what killed Lehman was Fuld's emasculation of the risk management function, which served as a moral compass.
Wednesday, October 21, 2009
Richard Baker (ex-KPMG’s Enterprise Risk Management practice) and Gary Pass (consultant in learning and sustainable change) helm. Baker runs Caerus Consulting. In Greek mythology, Caerus was the personification of opportunity, luck and favorable moments. He was depicted with only one lock of hair. His Roman equivalent was Occasio or Tempus.
"The ability of executives both to manage risk effectively and govern good risk management practices is problematic. Common practice often leads to erroneous measures, ineffective responses, costly mistakes or - worse - leadership lip service.
A complex interdependence between natural and human systems challenge conventional notions of management control. Developing a risk culture demands leadership that engages the wider organisation in a new way of thinking. Its aim is to identify develop new responses, processes and practices, which treat the threat of risk as an opportunity to be embraced. "
A webinar on "Creating a Pervasive Risk-Aware Culture throughout the Organization" runs in December.
Overview: The financial crisis provides an opportunity to re-evaluate an organization. Raising the bar on an institution's risk awareness is a critical step in re-establishing success. Creating an environment that rewards, supports, and sustains a risk-aware culture requires reviewing the risk management framework including governance, leadership, oversight, and risk appetite.
Anthony P. Ciavarelli will host. He is President and Chief Scientist at Human Factors and recent author of "The Relationship Between Safety Climate and Recent Accidents".
Let's assume he believes the recent Wall Street meltdown was no accident too.
His interests are Human performance in complex systems, operational performance measurement, team and organizational effectiveness assessment, human perceptual processes, human factors in design, and training technology and skill acquisition.
Participants in the course will learn the fundamental principles of human risk-taking behavior, with consideration to individual, work group, and organizational factors that influence risk decisions. The class will end with an exercise in which participants apply a Risk Culture Assessment Instrument to their individual organizations.
This course is designed to:
Define individual, work group (team), and organizational risks.
Discuss selected industry cases and causes of organizational failure.
Develop an understanding of organizational climate and "risk culture" factors.
Learn about risk culture, organizational performance, and failure.
Distinguish between qualitative and quantitative risk culture assessment methods.
Establish an enforceable code of conduct.
Initial and ongoing training.
Anonymous reporting hotline.
Rewarding employees that live the culture.
Author Greg Heaps writes that a company that follows this “will be rewarded with the risk of less risk, less fraud, less litigation, and happier employees.”
On the whole, this sounds as reasonable as any plan can be before you actually try to implement it. But.....this last concept of rewarding employees that live the culture. Do we really need to reward those who behave appropriately with a treat? When did we become puppies who sit, or kids who do their homework?
The reward of ethical behavior is to keep your job and continue advancing your career. You don’t deserve a cookie.
Sunday, October 4, 2009
This summer's record bank profits are essentially created by massive federal funding. To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.
The article, called "The Great American Bubble Machine," was written by Matt Taibbi. In it, he viciously attacks Goldman Sachs through a series of arguments, blaming the bank for engineering virtually every bubble, and pseudo-bubble, that has plagued the economy over the past hundred or so years.
This review is followed by terrific letter to the editor banter
Financial crisis: It was Gordon Brown's bubble that we saw burst
By Norman Lamont
Shortly after I became chancellor of the exchequer in 1990, I had a meeting with my Japanese opposite number, a charming, able man who insisted on speaking English without an interpreter. His English was better than my non-existent Japanese, but I could hardly make out a word he said. Eventually, leaning forward, I was able to discern one phrase endlessly repeated: "the bursting of the bubble".
Over the years, I met many Japanese ministers. The speech was always the same because the pain lasted a long time.
What we have been seeing is the bursting of the Brown bubble.
This is not the import of some problem from the US to Britain. America has had its own bubble, but so have we in the form of the highest personal debt per capita in the G7 combined with an unsustainable rise in house-prices, which we conveniently chose to confuse with prosperity.
Musings from February 2006 that resonate today.....
2006: A Deloitte white paper encourages those involved in risk management to ‘imagine the unimaginable’ when assessing potential risk to an organization. The key requirement for the success of this effort is the fostering of ‘a holistic and integrated risk management culture’.
Certainly the world can be perceived as a frightening place. It is hard to argue that bad things don’t happen. This is a conversation that engenders a very dangerous human emotion in the process of rational decision making: fear.
Much of the literature and many of the consulting firms admonish organizations to develop a ‘risk management culture’. Apparently this culture would be developed through the education of all members in the organization to be aware of identified hazards and to be on the lookout for potential problems that are likely to have negative consequences.
People understand risk, they manage it every day. This understanding, however, tends to be defined by their responsibilities in the organization. Therein lays the central task for risk management. Business managers have a depth of knowledge and understanding of the products or services they want to offer, but are likely to have little understanding of the operational environment necessary to deliver them. Operational managers (Legal, Tax, IT, HR, Facilities, etc.) have knowledge of their area of expertise but may lack an understanding of how it specifically applies to the desired product or service. The element that unites their efforts is the business strategy.
Simply focusing on growth as defined by quarterly financial statements is not sufficient. Management teams must understand the priorities of the organization, the rationale for funding certain projects and not others and the results that are expected in a variety of metrics form customer satisfaction, market penetration, efficiency and transparency, etc. It is only when these conditions exist that an awareness of risk (risk defined as not only hazards but also opportunities and uncertainties) can be added to the existing culture.
Cultures exist. The task is to add a more conscious awareness of risk
In this environment, risk and the management of it can be understood as essential to the growth of the business. The risk management function becomes an element that unites the various disciplines in a common effort. In this context, mangers can be motivated to not only describe and report threats and hazards to the strategy, but also opportunities and uncertainties that, if embraced can have a positive effect.
These excerpts are from Bill Sharon, CEO and Founder of Strategic Operational Risk Management Solutions who focuses on streamlining operational environments in the service of the business strategy. More at
As Mikhail Fedorov sees it, the crisis has exposed the shortcomings of a whole host of risk techniques, and major soul-searching is now underway to ensure that the risk and controls functions in financial institutions will be more robust, authoritative and accountable in future.
According to the latest Financial Stability Report from the International Monetary Fund, global bank losses are likely to exceed US$4.1 trillion. In March 2009, the Economist Intelligence Unit conducted a global survey to assess how risk management is changing in the world’s financial institutions. Key findings from this research include the following:
We are seeing an erosion of confidence and a retreat from risk. The survey reveals an industry that appears shell-shocked by the events of the past 18 months.
Transparency is a common theme to proposed reforms.
Reforms to risk management within institutions will be far-reaching and comprehensive.
Culture, expertise and data are the weak points in companies’ risk management.
Respondents lack confidence in the ability of supervisors to formulate the right response to the crisis.
Read the full report here
Thursday, October 1, 2009
It's great to know that during the worst economic crisis since the Great Depression, the wealth of the 400 richest Americans, according to Forbes, actually increased by $30 billion. Well golly, that's only a 2 percent increase, much less than the double digit returns the wealthy had grown accustomed to. But a 2 percent increase is a whole lot more than losing 40 percent of your 401k. And $30 billion is enough to provide 500,000 school teacher jobs at $60k per year.
Collectively, those 400 have $1.57 trillion in wealth. It's hard to get your mind around a number like that. The way I do it is to imagine that we were still living during the great radical Eisenhower era of the 1950s when marginal income tax rates hit 91 percent. Taxes were high back in the 1950s because people understood that constraining wild extremes of wealth would make our country stronger and prevent another depression. (Well, what did those old fogies know?)
Had we kept those high progressive taxes in place, instead of removing them, especially during the Reagan era, the Forbes 400 might each be worth "only" $100 million instead of $3.9 billion each. So let's imagine that the rest of their wealth, about $1.53 trillion, were available for the public good.
What does $1.53 trillion buy?
-- It's more than enough to insure the uninsured for the next twenty years or more.
-- It's more than enough to create a Manhattan Project to solve global warming by developing renewable energy and a green, sustainable manufacturing sector.
-- It's more than enough to endow every public college and university in the country so that all of our children could gain access to higher education for free, forever!
Instead, we embarked on a grand experiment to see what would happen if we deregulated finance and changed the tax code so that millionaires could turn into billionaires. And even after that experiment failed in the most spectacular way, our system seems trapped into staying on the same deregulated path.
Instead of free higher education, health care and a sustainable economy, we got a fantasy finance boom and bust on Wall Street which crashed the real economy. We have our 400 billionaires, and we have 29 million unemployed and underemployed Americans. We have an infrastructure in shambles. We have an environment in crisis. We have a health care system that would make Rube Goldberg proud. And we have the worst income distribution since 1929.
I hazard to guess that each and every Forbes 400 member could get by with a net worth of $100 million. I don't think that would kill their entrepreneurial drive or harm our economy--in fact it would be a major boon to the economy to step back from the edge of such massive concentration of wealth. The real problem is getting there form here. A wealth tax that kicks in when you become worth more than $100 million would be a good start. The Eisenhower tax rate on adjustable gross income over $3 million a year would help as well.
And please let's not call it socialism, now that we've placed the entire financial sector on welfare to the tune of over $13 trillion in subsidies and guarantees. (By the way, the yearly budget outlays for means tested programs for low income citizens is about $350 billion per year. So Wall Street's welfare is about 37 times as large as welfare for poor.)
So if narrowing the income/wealth gap isn't socialism, what is it? It's the America that thrived in the 1950s and 1960s. It's the America that created a middle-class and vowed never to let the financial gamblers return us to another depression. It's an America that put its people to work and built an infrastructure that was the envy of the world.
One question which continues to vex them however is how to spot the next big emerging risk.
The answer starts in an excerpt from leading expert John Farrell of KPMG
Many businesses around the world are currently considering how they can improve their capabilities for identifying that next big emerging risk — long before it has time to manifest itself into something truly damaging and destructive.
However, I believe that much of the thinking in this area may be misdirected. Too many organizations are looking for that magic solution; the silver bullet which will home in on the gravest danger and eliminate it with a minimum of fuss.
They are wasting their time. There is no switch which can be flicked, no toolkit which can be installed, no crystal ball which can be relied upon. Rather, companies should seek to better understand their own risk capabilities as the answer lies within their existing risk management frameworks and risk culture. These should be redirected and refocused — as many businesses appear to be currently looking in the wrong places.
Emerging risks do not appear as a dust cloud on the horizon; something which the most eagle-eyed observer with the best telescope might hope to spot. Instead, these risks frequently emerge from within — as a direct consequence of management actions. The trick therefore is having the thinking and techniques in place to consider all the possible risk ramifications which can arise from key business decisions......
......One of the best ways to deal with this is in enhancing and refocusing existing capabilities within an organization; it is nothing new. Perhaps the biggest risk we actually face is that too many businesses might not realize this.
And tip of hat to Sohan Dhande for his excellent blog post(s).
In Modernity and Self-Identity, Anthony Giddens uses the term risk culture. He does not mean that social life in modern society is any more risky than it use to be. Rather, he states:
“modernity can be understood as roughly equivalent to the industrialized world.” In this sense, both the industrialized world, or, the social relations implied in the production processes of technology, and, capitalism, which for Giddens means “a system of commodity production involving both competitive product markets and the commodification of labor power,” come together to form a risk culture.
In other words, for Giddens, risk and reflexivity, on an individual level and on an institutional level, are the essential ingredients of modernity. Whereas in traditional cultures social environments were more stable, change was routinized, and, the need to calculate outcomes for possible futures were minimized, in modern culture, if individuals are to organize their own relations to the encompassing social world, a maximum of reflexivity is required. In the setting of modernity, the connection of the personal with social change takes place in the reflexive process of self-identity.
Colm thinks higher capital requirements are coming, by way of increased risk-weightings, and he also thinks a hard leverage cap, maybe in the 20x range, will become a reality.
Tuesday, September 29, 2009
Please read and look forward to your comments.
"An Ounce of Prevention" by David A. Moss
The magnitude of the current financial crisis reflects the failure of an economic and regulatory philosophy that proved increasingly influential in policy circles during the past three decades. This philosophy, guided more by theory than historical experience, held that private financial institutions not insured by the government could be largely trusted to manage their own risks—to regulate themselves. The crisis has suggested otherwise, particularly since several of the least regulated parts of the system (including non-bank mortgage originators and the major broker-dealer Bear Stearns) were among the first to run into trouble. Former Federal Reserve Chairman Alan Greenspan acknowledged in October 2008, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
From Crisis to Calm
Of course, financial panics and crises are nothing new. For most of the nation’s history, they represented a regular and often debilitating feature of American life. Until the Great Depression, major crises struck about every 15 to 20 years—in 1792, 1797, 1819, 1837, 1857, 1873, 1893, 1907, and 1929-33.
But then the crises stopped. In fact, the United States did not suffer another major banking crisis for just about 50 years—by far the longest such stretch in the nation’s history. Although there were many reasons for this, it is difficult to ignore the federal government’s active role in managing financial risk. This role began to take shape in 1933 with passage of the Glass-Steagall Act, which introduced federal deposit insurance, significantly expanded federal bank supervision, and required the separation of commercial from investment banking.
The simple truth is that New Deal financial regulation worked. In fact, it worked remarkably well. Banking crises essentially disappeared after 1933 (see chart), without any apparent reduction in economic growth. Not only was the period of 1933-1980 one of unusually strong growth, but the growth was broad based, associated with stable or falling income inequality, rather than with the rising inequality that took hold after 1980.
Perhaps even more striking, America’s post-Glass-Steagall financial system soon became the envy of the world. Although critics had warned that the forced separation of commercial from investment banking could undermine the nation’s financial system, American financial institutions from Morgan Stanley to Goldman Sachs dominated global high finance for the remainder of the century.
Read "Ounce of Prevention" from Harvard magazine.
Friday, September 11, 2009
Wallsion says "it is simply too much to expect any human institution to step outside of itself and see the error of its ways when it can plausibly ignore those errors in the short run."
The buck has to stop somewhere. Institutions must police themselves. Wallision says " to set a thief to catch himself is quite a different matter". If that is so, we are doomed.
Friday, August 28, 2009
The problem is we now have a growing number of "certifications" and no current way of comparing the best and the most relevant. However, creating an industry benchmark for risk knowledge -or a series of benchmarks - is a good step in the right direction.
Monday, August 24, 2009
The study states that to be effective, Risk Culture assessment needs to focus on two key categories:
Values and Ethics - the core principles that drive behavior. Are the values of the organization clearly defined and communicated adequately? Does the culture support risk awareness?
Internal policies and practices - the application of values and ethics. Is the culture open to challenging tradition and implementing new ways of doing things? Do employees feel it is safe to speak up? Is talent management in place to retain experienced employees? Do leaders show commitment to values and ethics through their actions? Are roles and governance structures in place to manage risk?
Monday, August 17, 2009
"I now feel we were misled about the risks. I shouldn't have trusted what we were told, but you just assumed that someone would have done their research and known the risks.
If we failed, Barclays would take the money we generated. For me, this created a culture of selling for the sake of selling rather than doing what's good for the client. I just couldn't do this any more."
Consider the impact that a "sales culture" can have on a risk culture...
Monday, July 27, 2009
Perhaps Bernstein’s most enduring contribution to the finance world his clear and concise explanations of the nature of risk, making the concept of risk directly relevant to modern portfolio selection in a way non-academics, and Wall Street movers-and-shakers, could easily understand.
Read more about his life and works.
Mr. Bernstein and the late Robert L. Heilbroner wrote together. They were lifelong friends having met in first grade at the Ethical Culture School and moved on together to Horace Mann and then Harvard, graduating in 1940 with degrees in economics. Like many others of their era, they were Keynesians, and they argued that public spending was necessary for a healthy market economy. They also argued that government’s role in the economy should not have been curtailed as President Ronald Reagan sought to do in the 1980s, when he argued that the deficit was too large to maintain public spending. It was not too large, they said, as a percentage of the nation’s economic output.
Thursday, July 23, 2009
This survey gives you the opportunity to share your views on Operational Risk Management and Basel II AMA: http://www.surveymonkey.com/
Monday, July 20, 2009
He found that "many boards inadequately understood the type and scale of risks they were running". Moreover, the bonus awards at banks led to "excessive risk -taking".
Mr. Walker proposes that nonexecutive board members devote up to 50% more time on their job and have greater responsibilities in contolling the risks of the bank they oversee.
This is clearly a step in the right direction for changing the risk culture of the banking sector. Maybe, a little training for non-executives on banking and risk management would also serve them well too!
“Executives could improve their organizations’ performance and position themselves for economic recovery by linking and balancing risk management and performance management to aid their decision-making and increase shareholder returns,” said Dan London, managing director of Accenture’s Finance & Performance Management practice. “Being effective at this also requires companies to integrate their risk management capabilities enterprise-wide.”
Survey respondents also identified a number of common problems with their risk-management functions, including:
Ineffective integration of risk, return and capital issues in decision-making (identified by 85 percent of respondents);
Lack of alignment between the company’s strategies and its risk appetite (85 percent);
Insufficient enterprise-wide risk culture (82 percent);
Inadequate availability of timely risk, finance and business data (80 percent);
Lack of integration and aggregation across all risk types (78 percent); and
Ambiguous risk responsibilities between corporate and business units (78 percent).
Those findings are from Accenture's 2009 Global Risk Management Study, which is based on a survey of 260 chief financial officers, chief risk officers, and other executives with risk-management responsibilities at large companies in 21 countries.
The survey also found that companies expect new risk-related challenges as a result of the current economic environment, including more stringent regulations and increasing costs associated with growing complexity in the risk environment. For instance, 41% of respondents reported that their risk-management costs have increased at least 25% in the past three years, including 14% who reported a 50% rise in such costs.
Asked to identify the biggest challenges they face over the next two years as they develop more rigorous risk-management capabilities, respondents pointed to the difficulty of aligning with the overall business strategy (identified by 93% of respondents); the need for more effective collaboration with business units (89%); the need for greater integration in the firm's processes and culture (89%); and inadequate resources and talent (88%).
Accenture's analysis pointed to a lack of integration of current risk-management and performance-management processes: While nearly half the respondents said their company's risk-management function is involved to a great extent in strategic planning (48%) or in investment and divestment decisions (45%), only 27% said the risk-management function was involved to a great extent in objective-setting and performance management.
"The current economic downturn is the ultimate stress test of a company's risk management function, and the lessons learned can be leveraged to restore confidence and create a stronger, better, integrated and aligned platform for improving performance under a variety of business conditions," said Dan London, managing director of Accenture's Finance & Performance Management practice.
About the study: Accenture conducted a survey of 260 chief financial officers, chief risk officers, and other executives involved with risk management at large companies in 21 countries in Africa, the Asia-Pacific region, Europe, and North and South America. The purpose of the survey, which was conducted via the Internet between November 2008 and February 2009, was to understand the challenges companies face with regard to their enterprise risk-management capability as well as the approaches, tools, and structures that help some companies manage risk more successfully than others.
Tuesday, July 14, 2009
He says that "the people running this system remind me of gangsters who manage to walk out of the courthouse with a suspended sentence and can’t wait to get back to their nefarious activities".
His write-up takes the industry to task and for fighting against creation of the Consumer Financial Protection Agency. He says banks are wringing huge profits from overdraft fees that often are sky high and in handled in ways that are exploitative, if not predatory, and that the last thing in the world that "malefactors of great wealth" want is a fair marketplace.
Interested in your views. Have we reached a whole new level of chutzpah here?
Read the Article
Monday, July 6, 2009
He likes the creation of a single bank regulator; the focus on strong capital and liquidity requirements; the regulation of all financial services firms; and strong oversight for key markets, such as derivatives. However, Mr Dimon does suggest that new regulation does not hinder the banks' ability to innovate; that it still creates "space" for the responsible development of new products and services. This keeps US banks competitive and prevents the flow of capital to other nations.
Mr Dimon also asks how banks can win back the trust of the American people. He suggests that bank leadership should foster a culture within their respective organizations "that focuses on integrity, strong execution, quality products, long-term value creation, and doing the right thing".
He also adds " there must be a relentless focus on risk management that starts at the top of the organization and permeates down to the entire firm".
Now we are talking!!
Please click link below for full article:
Dr Kerry Sulkowicz, a clinical professor of psychiatry at NYU, in a recent WSJ article (see bleow for link) observes that it is going to be very difficult to roll back these inflated salaries in a few years when times are much better and demands for big bonuses return. The total compensation costs to these banks in the future good times will be significantly higher than the 2006 peaks.
More importantly, Dr Sulkowicz believes that money is not the only way for banks to create loyalty. Strong leadership inspires a sense of pride in employees and they remain loyal to the CEO. Compare Chase and Citi right now - and the culture that each leadership has engendered.
Money does not always have to buy everyone's loyalty, but leadership is a better way of ensuring it.
Click below for WSJ article:
Banks had created moneymaking machines that had "seduced" everyone into overlooking the risks built into the business models. According to the BoE offical, ROE - a measure of well banks manage their assets (and thus a benchmark of skill) - was being boosted by higher leverage - a measure of gambler's luck.
Most banks with a low ROE were most likely to resort to higher leverage and therefore rely on "luck" to make money.
A banking culture that was driven by luck rather than judgement or skill can only survive until the next crisis.
Please click below for the FT article:
Monday, June 22, 2009
Interesting opinion piece from the energy business.
The writer points to a shift in opinion is taking place for the energy sector. Politicians
have for a century allowed energy companies to profit from passing on risk to the consumer, "just as they allowed the bankers to do"
He talks about the true cost of coal-powered energy -- and the choices that would be made if risk were put into context. A parable for our times..........
Thursday, June 18, 2009
"Much of the literature and many of the consulting firms admonish organizations to develop a ‘risk management culture’. Apparently this culture would be developed through the education of all members in the organization to be aware of identified hazards and to be on the lookout for potential problems that are likely to have negative consequences. The problem with this approach is that there seems to be an assumption that the organization does not have a culture to begin with that already intuitively understands risk; one that only needs to be leveraged through a structured effort. The decisions about the response to financial, physical, operational (or any of the other categories of risk) need to be made within the context of what the organization is trying to accomplish."
I think Bill is confusing "risk averse" with "risk conscious". The idea is not that risk is bad. In fact, business without risk, well...there is no business without risk. But, it is a fairly good assumption to make that, in most cases, there are multiple, individual interpretations of risk appetite in most organizations. And, as Bill points out, risk appetitie must be aligned with organizational and business goals. Yes, education is very important. But, it's not education about avoiding risk or "risk is bad" - it's about communicating a defined and appropriate risk appetite enterprise wide so that everyone is on the page about what kinds of risk will make the firm more profitable and what kinds will enganger its existence.
For full article click here.
Friday, June 12, 2009
On Google Trends it appears that the search for "Risk" declines lightly but the search volume increases at the same time. A first deduction is that the factor risk in our lives is quite stable, and even declining over the last years. It maybe something people get used to. One must take into account that risk is a very broad area.
More surprising was the number one country where the term Risk was used: Singapore.
For those who have been in Singapore know that this is a country or city-state that is organized until the very last end. There is no litter on the streets because the fines are very high.
This means at least that risk and strictly organizing are closely related; companies try to over-organize to reduce the risk of business-failure.
For Mr. Bool's full article
Entitled "After the Storm: A New Era For Risk Management in Financial Services", the findings included:
1) Only 32% of respondent banks had undertaken a thorough overhaul of their Risk Management function.
2) 27% said they only felt they had minor changes to make to their risk function.
3) 41% stated that their #1 focus was on improving risk data quality vs. 33% that have "improving governance" as their top priority.
4) Only 24% believe they need to improve their communcation of risk across the organization.
5) When asked what they saw as they key barriers to improving risk management in their organization, 40% cited poor data; 32% had lack of expertise and 30% had inadequate systems.
6) Lack of risk culture among the broader businesses in the organization was cited as the key barrier to improving risk management among 31% of banking respondents.
So, as one commentator remarked with respect to risk culture:
"Risk, in the final analysis, is not a function within a firm, it is the firm."
Thursday, June 11, 2009
He goes on to say " By outlining these principles now, we begin the process of bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system."
Mr. Geithner is absolutely right in this regard and these changes in compensation practices will assist banks in focusing on changing their risk culture.
But, has the Obama administration missed a great opportunity to go much further on executive pay? Is this not an ideal time to take the bull by the horns and undertake a real "grass roots" overhaul? What do you think?
Please see Geithner's full comments and a short video of his TV remarks:
In the is paper, the 3 authors state that those banks that fared better in the recent crisis benefited from a strong risk culture combined with a focus on 3 effective lines of defense: Top Management and the Front Office; the Risk Function; and Audit.
The paper emphasises 3 steps in building a strong and appropriate risk culture in banks :
-Raising the profile of the risk teams/functions (including attracting talent and expertise)
As we have being saying for months now, establishing an appropriate risk culture requires strong leadership, constant communication and an embedded awareness and understanding of risk across the whole organization. This article is worth a read:
Monday, June 8, 2009
While clearly stating that confidence in capital markets is important, the authors believe that there are huge structural flaws in the architecture of our financial system, and that many of the fixes that the Obama administration has proposed will do little to address them. In fact, all the changes we have seen and heard about from Washington are merely papering over the deep cracks.
The authors also argue that , if commentators were lamenting the financial system as dysfunctional only 6 months ago, why are they now lauding a model that simply restores the status quo?
The solution, it seems, is for the administration to have experienced Wall Street folks advise them on the changes rather than economists, academics and theoreticians.This would allow people who know how the markets work in the real world to be in key decision-making positions that could significantly change the system for the better.
Moreover, one example the authors use to promote a balanced risk culture in banking is to make the senior executives akin to general partners, whereby their prudent risk taking is well compensated and any cavalier decisions that incur heavy losses, result in dismissal. In addition these partners would have the bulk of their net worth tied up for up to 10 years, so short term/expedient profit decisions with high and /or long term risk are not encouraged.
A change in the system , in the risk culture of the financial services industry will only happen when there is a realignment of these banks interests with those of their shareholders, their clients and the public at large.
The New York Times article
The study evaluated stages of progress in the following categories: establishing an ERM culture, aligning ERM programs with organizational goals, formal ERM framework adoption, and executive level participation.
Friday, June 5, 2009
"This is not a normal retirement," said Anthony Plath, a finance professor at the University of North Carolina at Charlotte. "There's something going on here that's related to loan losses and the performance of the bank."
"We are just beginning to see many companies getting serious about ERM and moving from just talking about it to implementing robust methods that address myriad risks," said Prakash Shimpi, a managing principal of Towers Perrin with global responsibility for the company's ERM practice. "It is abundantly clear that ERM will need to be higher on the CFO's to-do-list if in fact companies wish to maintain healthy levels of financial performance."
Thursday, June 4, 2009
Deloitte publishes a detailed set of nine principles of a Risk Intelligent Enterprise. A good read through of insights and practical steps for incorporating the concepts within your organization.
Risk has a positive side, one that applies to value creation and risk taking for reward. Introducing new products, entering foreign markets, acquiring competitors, forging partnerships - all are challenging endeavors, and if you don't properly manage the associated risks, you may not reap the potential rewards.
"We have a suspicion that many bankers remain unconvinced by the need for change and believe that, once 'the storm dies down’, it will be a case of 'business as usual’,” the report said.
Monday, June 1, 2009
Read on and prosper!
Wednesday, May 27, 2009
If the result of theire efforts is the ability to overrule wayward national regulators in order to ensure that we do not see a repeat of the credit crisis, then we should be all in favor of the proposals from Brussels.
Sensible regulatory oversight = prudent risk taking.
The government's intention in curbing compensation - especially the huge bonuses - was to instill a culture of moderation at these banks when it comes to risk taking. Less risk, less reward. Or, the smaller the bonus payout, the less bankers will need to take unnecessary risks.
Clearly, by giving the risk takers (investment bankers) higher salaries to recompense them for their lost bonuses, certain banks are indicating that they do not see a need to reduce their risk appetite. (It is notable that neither Goldman Sachs nor J.P Morgan Chase are intending to raise base pay).
Also, the argument that there is a need to pay big bucks to retain key employees is a moot one. Let them go somewhere else.If they are that greedy and risk "perverse", then let them risk another bank's capital.
Until this type of greed leaves Wall Street, the culture of common sense in risk management will not prevail.
In the face of the current financial crisis, Millstein has been at the forefront, calling for boards to take greater responsibility and improve oversight of risk management. He is confident that the lasting effect will be positive, not negative, seeing the world as one in which real values are more important than the values we created in the 1980s and 1990s. The first thing we must do? Restore trust in the system.
He recently delivered the keynote address at the KPMG Audit Committee Issues Conference,
His message was clear: Directors need to restore trust and reset their goals. What follows is an excerpt from Millstein’s speech. Here's a link to Millstein's article or go here for the full text
Join the Economist Intelligence Unit as they present findings on global enterprise risk management (ERM) in the financial services sector.
FACT: More than 70 percent of the world’s leading financial services executives believe that losses stemming from the credit crisis were largely due to failures in addressing risk management issues.Listen in to this audio Webinar to learn how 316 financial organizations are evolving their risk management structure in light of the ongoing credit crunch.
The current financial services business environment.
Why conventional risk management measures failed.
Emerging ERM ideas and approaches.
How firms are implementing risk management change.
What the future holds -- the evolution of ERM for financial services.
LEARN MORE AND REGISTER
MMC states that "the most important - and difficult – task for the management team is to instill a risk management culture into the business. Every individual, from director to receptionist, must understand and be aware of the approach being taken by the company. Most importantly,
they need to know what their role in the process is – “what does this mean for me?”."
Deepak Moorjani (currently involved in litigation with Deutsche Bank) shares his perspective on his former firm's risk policies and the culture and reward structure that encouraged these,.
His rant at this blog is a good read.
Thursday, May 14, 2009
"Management can not tell you when to act or to choose when -- "doing the right thing" wins over "doing whatever it takes." If they have to tell you which one is right it will be to late to act this response has to be a reflex action if not, then you are the wrong person in this slot the separation process has to be look at and adjusted.Knowledge of the "risk culture." was something that you brought to the table when you where hired."
Well, this just about says it all and explains very clearly how we got into this ecomomic mess to begin with. Risk culture is not portable. It is not something you are born with. It has nothing to do with your "gut". It has to do with adhering to a very well articulated enterprise risk profile which includes the risk appetite. It is about aligning the entire enterprise behind that profile and doing everything possible to compete, given its parameters.
The idea that "really sharp guys" can or should make these decisions on the fly fits Wall Street culture perfectly and that's the problem. Everyone is a quant. Everyone can "smell" returns. Everyone is running their own little side show until, quess what? The enterprise can't support their deals - and then the whole thing caves it.
It's one thing not to have understood this concept before the crash - but the fact that there are people out there who continue to think it afterward is a good indication of the need to communicate and train like crazy.
A good read on why it is important for directors to understand the risk culture... because it influences the decisions of management and employees, with data from the KPMG survey of 500 bank executives.
Board members have taken a greater interest in their company's risk management programs, trying to understand the top risks facing the organization and their risk mitigation plans. But one area of the risk management program that has not been a focus until now is a company's "risk culture," a critical element of risk management efforts and an area that board members should better understand.
Read What is Risk Culture, and Why it is Important? ,
Friday, May 8, 2009
On 19 May at 1:00 p.m. a live Thought Center Webcast will delve n the issues risk professionals face as they look to understand their new operating environment and adapt risk and regulatory cultures to meet new paradigms.
Traditionally there has been a separation of credit, market and operational risk functions within many financial services institutions. The effects of the current economic crisis indicate that this is no longer acceptable. Institutions are answering the call from internal and external stakeholders for improvements in transparency and communication across all risk classes, but there are challenges.
The panelists will discuss:
- The balance between quantitative and qualitative assessments
- The changing regulatory environment Process and control improvements
Paul Glasserman, Jack R. Anderson Professor of Business Finance at Columbia University Graduate School
Paul Schotten, UBS Bank, New York, Senior Vice President Credit Risk
, Managing Director & Head of Risk and Quantitative Analysis, Blackrock, Inc.
Michael Moriarty, Deputy Superintendent for Property and Capital Markets at the New York State Insurance Department
Steve Lindo, Executive Director of PRMIA
To register for this event go to New paradigms in risk management