Top Bankers Urged to Keep Focus on Risk Management

Banks have made great progress in managing and controlling risk, but the rapidly changing environment presents constant surprises and problems, the world's leading bankers were told Tuesday.

Bankers should not underestimate the potential for disruption from many corners, including troubles in Asia, the year-2000 problem, a sudden rise in interest rates, and a reversal in robust equity markets, said a panel of speakers at the International Monetary Conference. They addressed reporters following a closed-door session with about 100 bankers.

The immediate challenge, said BankAmerica Corp. chairman David A. Coulter, is "to ensure that risk management is a core competency in banking." This is especially important at a time when mergers are creating ever-larger institutions, he and other panelists said.

The speakers stressed that they saw no immediate threats to the banking system. As former Federal Reserve Bank of New York President E. Gerald Corrigan put it, "most internationally active financial institutions are less prone to life-threatening 'accidents' than was the case 10 years ago."

Nevertheless, speakers saw reasons for concern, both inside and outside banking. Several pointed to the development of more sophisticated control and risk management systems-notably credit risk modeling tools-as a great advance but not a foolproof safeguard against trouble.

"We're not ready to run victory laps to celebrate the infallibility of risk management systems, and I don't think we ever will be," said Mr. Corrigan, now a managing partner at Goldman, Sachs & Co.

Rolf E. Breuer, spokesman of the board of managing directors of Deutsche Bank, said risk management models "bring method and structure to our investigations" of how to understand and manage risk, but they are no substitute for "vigilance and sound judgment."

Asked to identify imminent risks, Mr. Breuer cited continued political and economic turbulence in Asia. "We have made progress, but we are not on the other side of the river yet," he said.

He also worried that a sudden, sharp rise in interest rates could jolt investors, brokers, and traders who have not experienced one before.

Picking up on this theme, Mr. Corrigan observed, "there are many people in institutions and markets that have not seen a full economic, interest rate, or credit cycle."

"Trees don't grow to the sky. This nirvana will not persist forever," Mr. Corrigan said.

Mr. Corrigan emphasized that market corrections in and of themselves "are a natural and healthy part of overall market dynamics."

But, he added, "instability enters the picture when asset price changes produce the fear, or the reality, of credit problems which, in turn, raise the specter of nonpayment in accordance with contractual obligations."

He voiced concern that "the persistence of narrow credit spreads may signal potential credit market problems down the road" and counseled bankers that "an extra measure of counter-party credit due diligence is in order."

Because risk-taking lies at the heart of banking, bankers cannot and should not seek to eliminate risk, Mr. Breuer said. But they can decide which risks to embrace and which to shed, judge how much capital they need to buffer themselves against losses, and charge a fair price for the risks they assume on behalf of customers.

The year-2000 problem provoked considerable concern. "It has the potential to get very, very, very messy," Mr. Corrigan said. Solving the problem will require "tremendous effort over the next 12 months." Without it, "I don't think enough can be said or done to address those risks."

Mr. Coulter said many large banks are "well along" in revamping computer systems to recognize dates beginning in 2000, but said more contingency planning is needed in vital areas such as keeping the payments system operating smoothly.

Again and again, speakers returned to people issues, saying they are part of both the problem and the solution in managing risk.

"We've all heard about rogue traders, rogue brokers, even rogue clients," said Sir Andrew Large, deputy chairman of Barclays Bank PLC, London. "As firms get more complex and deals cross frontiers," banks must grapple with "how to control all that."

The key to managing risk, said Mr. Breuer, is "continuing control of your own staff. They optimally have the market experience and very good insights into what has happened in the past."

And while risk management models can draw on the past to predict future outcomes, only people can think through all the possibilities, he said. "Your risk management officer has to ask, 'What can happen that has not yet happened in the past?'"

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