With all the attention in Washington being given to executive compensation, the credit cardholders' bill of rights, student loans, and the concept of a single banking regulator, the issue of risk management reform seems firmly stuck on the political back burner. Maybe it's just too complex. Certainly it doesn't fit comfortably into a sound bite. But unless regulators ensure that risk management becomes an integral part of banks' corporate culture, from the trading floor to the boardroom, the goal of preventing systemic failure may prove much harder to achieve.
While many large institutions are taking steps to strengthen their risk management protocols, few seem close to adopting the improvements recommended in the Group of 30's "Framework for Financial Stability" as a key to financial reform. These steps include: coordinating board oversight of compensation and risk management efforts, with a focus on balancing prudence and long-term returns with risk; board-level reviews to set risk policy; making sure risk management and auditing are fully resourced and independent, with the risk management component reporting directly to the CEO; and continually monitoring major counterparty risk exposures and reporting the results to senior managers, regulators, and the central bank.