Should banks have "czars" to oversee risk management?
While there has been a trend in the industry to create a senior post for companywide risk oversight, some evidence suggests that risk committees comprising senior executives are gaining favor.
"The industry is really moving away from risk czars," said William Spinard, a managing director at Furash & Co. in Washington, D.C. "We found that doesn't really work. It becomes another internal auditor, it becomes a Gestapo. The risk czar concept doesn't appeal to a lot of banks except for the really autocratic ones."
A recent study by Furash and the Bank Administration Institute found that just 14% of banks are consolidating risk management under one officer. However, more than half are planning to revise risk policies and procedures.
This organizational issue is being played out as banks are forced to monitor and account for a broad range of risks. Last year, the Office of the Comptroller of the Currency announced a program that identified nine risk types - credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation. Regulators do not advocate a particular risk management model.
Mr. Spinard said the drive for enterprise risk management has disrupted traditional executive roles at many banks. "Of the seven or eight categories of risk that everybody is concerned about, three or four - liquidity, interest rate, and market - are under the auspices of the CFO or asset-liability management," he said. "They ain't giving them up."
But experts stress that organizational hierarchies are far less important than integrating risk management into a bank's culture.
"That's where firms like J.P. Morgan and Bankers Trust have differentiated themselves from a lot of other places," said William Ferrell, president of Ferrell Capital Management, Greenwich, Conn. "When it becomes part of the culture, it becomes part of every business decision, it becomes part of every capital allocation decision, and it becomes part of every resource allocation decision."
Experts say regional banks can learn a great deal from money-center and investment banks.
At Goldman, Sachs & Co., for example, a risk committee comprising the chairman and division heads meets weekly to allocate risk capital and review major positions.
"The risk committee basically sets the overall environment for how much risk we want to take and where we want to take that risk," said Robert B. Litterman, a Goldman partner for firmwide risk. "It does that not only for market risk but also credit risk. And the committee worries about reputational, operational, legal, and all those other different types of risks."
The group that Mr. Litterman heads acts as the police. "When a trader or trading desk goes over their limit, we are guys that report that and make sure that something gets done," he said.
To measure its exposures, Goldman uses value-at-risk, which gives an up-to-the-minute picture of the firm's risk exposures worldwide.
Mr. Ferrell spoke in admiring tones about Goldman's capability and the technology that supports it. "They can hook up 110 trading desks by a satellite system that tells them what the value-at-risk is on a position, as it's put on, and E-mail it back to the trader in about 7 or 8 seconds, and tell him what the impact is on Goldman's total balance sheet," he said. "That's pretty cool stuff."
Mr. Litterman said Goldman's transition to value-at-risk, which began two years ago, "was amazingly easy." He recalled it took just two weeks for the risk committee to adapt to the new system.
"We just started using it. We worked with the different divisions to set limits on the different areas," said Mr. Litterman, "and we communicated these to the risk committee. They approved the limits. From that point on, we started talking in this new language. And now it's just the obvious language to use."
To be sure, the parallels shouldn't be overstated between Goldman - which has hundreds of traders taking and managing risk in financial markets worldwide - and commercial banks.
But experts said Goldman's proactive approach to risk management could set an example for commercial banks.
Mr. Ferrell, for example, noted that many banks regard risk management as a way to avoid embarrassing losses.
To be effective, banks must also devote significant resources to risk management. Ferrell Capital estimated that a regional bank should budget at least $1 million for effective companywide risk management.
"The real value of risk management," Mr. Ferrell said, "is not just in the defensive function but, from our firms' perspective, as an extraordinarily powerful tool" to go on the offensive with business decisions.