Risk management is a discipline that is being taken far more seriously these days thanks to the current financial crisis. Translation: the financial meltdown means big opportunity for Risk Managers, according to CFO.com. The report states the “often-misunderstood category of finance worker, which already was showing a rising profile, may now be in line for a quantum leap.”
“It’s an exploding category,” says Mitch Feldman, President of executive search firm, A.E. Feldman. Industry veterans recruiting for A.E. Feldman, point out that Chief Risk Officers who have been tested by previous market cycles are being handed more power. Investing in complex mortgage-backed securities is what led financial institutions into the current credit and mortgage crises, according to industry experts. Now, as firms struggle to minimize losses, risk management jobs are gaining significance and experienced Chief Risk Officers and Risk Managers are essential. A.E. Feldman also notes that financial and risk professionals with expertise in processes for assessing credit and counterparty risk and liquidity risk are in demand along with professionals with experience in restructuring and litigation support that can provide advice on how to respond to the evolving market conditions and subsequent regulatory changes.
But as the name might imply, risk management, is not about eliminating or minimizing risk. As CFO.com puts it, “the discipline is about avoiding uncompensated risk.” The report quotes Aaron Brown, a Risk Manager at hedge fund AQR Capital as saying, “You can’t be a good risk manager if you don’t love risk.”
But in today’s challenging economic climate, firms must balance risk with caution and the long-term interests of and returns to shareholders. That’s according to the latest report, entitled “Financial Reform: A Framework for Financial Stability” released by The Group of Thirty (G30), an international body of leading financiers and academics. And banks are already stepping up to the plate. A growing number are increasingly willing to share sensitive risk information with their rivals, as lenders try to limit damage from debtors’ defaults, fraud and other hazards in the future, according to Reuters.
The G30 recommends strengthening boards of directors with greater engagement of independent members with financial industry and risk management expertise. In a recent report, which addresses flaws in the global financial system and provides 18 specific recommendations to improve supervisory systems, enhance the role of the central banks, and improve governance practices and risk management, the group says board oversight of compensation and risk management policies should be coordinated, with the aim of balancing risk taking with prudence and shareholder interests.
The G30 also says systematic board-level reviews must also ensure the establishment of parameters for a firm’s risk tolerance, and contends the risk management and auditing functions must be fully independent and adequately resourced areas of a firm. The risk management function should report directly to the chief executive and periodic reviews of a firm’s potential vulnerability to risk arising from credit concentrations, excessive maturity mismatches, excessive leverage, or undue reliance on asset market liquidity are essential. Lastly, the G30 recommends that all large firms have the capacity to continuously monitor and make available (within a matter of hours) their largest counterparty credit exposures on an enterprise-wide basis.
Already, the international banking industry is working to create common methods on how to report risk, according to Reuters. The report states the Risk Analysis Service (RAS), which provides data on more than $1.3 trillion worth of global banks’ exposure to debtors, said the number of participants had increased by roughly 25% in the past year, adding it expected the current number to double over the next year. Reuters quotes UniCredit chief risk officer Henning Giesecke, as saying, “We joined RAS so we could benchmark UniCredit against our competitors. It is helpful … because it provides us with an overall view of how an industry sector is performing.”
Meanwhile, Reuters states that mathematicians from IBM are helping analyze $44 billion of losses collected by the Operational Riskdata eXchange Association (ORX) in an effort to create better safeguards against operational losses. The report quotes IBM spokesman Bill Mew, as explaining, “You will get a far better and more realistic appreciation of potential risk if you have access to broad industry-wide data than you would from a single organization.”‘
Banks are also making progress in introducing standard methods for reporting risks and are currently developing better risk models to calculate probable gains and losses on their assets in a variety of scenarios, states Reuters. The report predicts the new focus on risk management will be one of the top drivers of spending on information technology and services by financial companies, which they expect to hit $364.5 billion globally by 2010, citing research by Consultants Celent.
Looking ahead, experts anticipate banks will face a deluge of regulation in the coming months, which bides well for risk management professionals. A.E. Feldman notes demand for Chief Risk Officers (CROs) and Risk Managers will remain strong.
The proof many be in the numbers. The Global Association of Risk Professionals announced in November 2008 that it provided the Financial Risk Manager Certification Exam to nearly 14,000 candidates around the world – a 35% increase over the previous year. According to the group, the record-breaking number of financial professionals who registered for the exam where from major cities across six continents including Mumbai, Beijing, Jakarta, Tokyo, Singapore, Seoul, Bangkok, London, Paris, Warsaw, Frankfurt, Istanbul, Dublin, Stockholm, Tel Aviv, Dubai, Melbourne, Sydney, Johannesburg, Montreal, Toronto, New York, Dallas, Seattle and Honolulu.
Source: A.E. Feldman
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