William Ferrell
President, Ferrell Capital Management
Greenwich, Conn.
Absolutely not. The global elite of financial institutions have for some number of years now had a considerable amount of resources dedicated to the quantification and analysis of risk. At this point, that art and science is quickly spreading to the superregional and regional. institutions because of two factors.
One is that the losses of 1994 and early 1995 highlighted the need to have such practices in place for better risk control and, therefore, better business management. Second, regulators have required banks to have appropriate risk management and control techniques in place in order to get approval for the businesses that they wish to engage in that take market risk.
So that process is continuing, and considerable time and effort are being spent on trying to spread the best practices of the industry among a wider group of financial institution constituents.
Jonathan Levin
Director of U.S. operations, Kamakura Corp.
New York
That has not been my impression. Everybody that we've spoken to is examining it.
One of the big reasons why there has been so much derivatives loss is that the financial institutions - and to a lesser extent the corporations - really don't have the proper tools to fully analyze and understand the potential risk associated with their derivatives exposure.
Putting derivatives software systems and analytical tools on the back burner just continues to create significant exposure to derivatives risk.
We're strong believers that in this Bankers Trust-Procter & Gamble (situation), clearly Bankers Trust had very aggressive sales people. But P&G had all the ability - and all the resources in the world - to hire top people to analyze the types of instruments they were buying and the appropriate systems they could have bought. If they had done that they would have had a much better appreciation for the type of risk they were getting into.
Also, there is a lot more risk embedded in common bank products like mortgages, credit cards, and things along those lines than in what you would consider to be traditional derivatives securities.
But the optionality embedded in things like mortgages (when people can prepay at any time), demand deposits (where they withdraw their money at any time), or credit cards (where they can pay down at any time) ... all that is risk.
Dr. Robert Mark
Executive vice president, Canadian Imperial Bank of Commerce
New York
Hell no. It is precisely the opposite. Most institutions that have failed or encountered major difficulties did so because they relied on an inappropriate risk management infrastructure.
At CIBC Wood Gundy, we have an integrated goal congruent approach to risk management that incorporates best-practice philosophies to policy, methodology, and infrastructure. A key component of the infrastructure is a risk MIS platform that includes production of the requisite risk reports on a timely and accurate basis. We buy the best and build the rest. Further, we hire technology triathletes with proven technical, market, and implementation skills.
