The Fall and Rise (and Fall) of Risk Management

Parachute Jump - Frederic Carmel

At a meeting with the ex-KPMG alumni this week, one of my ex-colleagues said, "It must be good for you, as Risk Management is making a comeback and that's your area of expertise."

"Not really," I replied. "If you look more closely, the type of people who are being offered roles are exactly the type of people who they were involved when the problems started last time. If you do the same thing over and over again and you employ the same sort of people, why will you get a different outcome?"

A legion of PhDs and MBAs calculated and recalculated their VAR while Rome burned. It is rumoured that many are training as economic experts or bringing their mathematical talents so a new branch of quantitative astrology.

Risk Management was the dog that never barked during the crisis and has not barked since. Repudiating the need for complex calculations and expensive Risk Management systems will not endear you to the self-interest of the vendors or the self-importance of the bankers. Many Risk Managers are recruited for their compliant nature (pun intended) and to provide window dressing for outrageous gambles.

Instead of dealing with a new set of liquidity requirements, we should go back to a few simple lending ratios that can be explained to the shareholder and compared across the banks. The banks should concentrate on how much money they can make for their clients (and not for themselves) as a benchmark. That would be a step in the right direction, but I have not seen that from a UK bank as yet.

I really don't mind if bankers make a bonus if they are creating extraordinary wealth for their clients, but looking around that is not the case. The misalignment of interests will need to be corrected otherwise we are just gambling on another bubble again.