Defect Seen In Banks' Risk Management

Large banks, Mr. Ong said, take very long-term risk such as five-year loans, seven-year loans and multimillion-dollar 10-year loans. But risk managers "sign a one-year or two-year contract on their job, and once that is up they leave because they look for greener pastures."

"Look at these recent debacles that every bank has a hold on and ask yourself, 'how many people who brought these transactions in are still with the bank?' I think you would be surprised," he said.

Once the risk managers leave, Mr. Ong said, they are no longer accountable and "it is the new group who supplanted them who now are responsible."

This, he said, creates a lack of continuity in risk management. "If you have a seven-year or 10-year loan, doesn't it behoove us to have continuity over that length of time?" he asked. "It's common sense."

A regime change within a bank "normally brings in a shift in paradigm that eventually is harmful to an organization," he said.

Individually, to be effective, Mr. Ong said, risk managers need to be effective leaders and communicators.

Quantitative skills, he said, "are a given; you must have that."

Unfortunately, Mr. Ong said, many risk managers who are not as "enlightened" tend to "tout their quantitative side, and that turns off a lot of people within their organization."

This happens because of their corporate cultures, "some of which value a more quantitative approach," he said. "I think the balance overall should be the leadership and the communication. It's very simple, it's common sense."

Mr. Ong added that common sense "seems to be very uncommon in this industry. I think it all has to do with compensation."

Maureen Miskovic, senior adviser for Eurasia Group in New York, told National Underwriter that the four cornerstones of great risk management consist of quantifying, measuring, monitoring and reporting on the risk to senior management "in such a way that they can hope to make some changes if they feel that's appropriate."

In order to implement these cornerstones, she said, "you have to hire the very best people in the risk management department that you can get." They should be "quantitative enough to do the math around the measuring and the monitoring."

Risk managers, she said, also need to have enough presence so they can articulate their concerns.

This should be done, Ms. Miskovic said, "in such a way that they don't look like crisis mongers," but rather a part of the team helping to get "great business done in a good way?to take the right kind of risk in order to get the right kind of return."

People like this, she said, "are rarer than you might think. It's pretty hard to hire them," though it is "easier than it was five years ago because risk management has become a discipline in its own right." Investment banks and financial institutions are no longer "reliant on taking somebody who came up through accountancy," she added.

Ms. Miskovic said trading houses would "do well to take on a risk manager with trading experience" because they have the experience of "what it feels like to trade" and what the hidden risks might be.