Kevin McClafferty knows a bit about risk management, one of the hot jobs in financial services right now. As head of credit risk management for Key Bank USA, Mr. McClafferty said, "The people who work in our group get calls daily" from headhunters.
That was a few weeks ago. Since then, one of those calls has lured the 33-year-old Mr. McClafferty away to FirstPlus Financial Group in Dallas, where he recently signed on as senior vice president for credit policy administration, with some credit risk management functions reporting to him.
Banks, insurers, investment houses, and other financial companies across the country are beefing up their staffs of people who identify and quantify risks undertaken in the course of everyday business and recommend procedures to manage the risk.
Institutions are seeking, for example, a better handle on how a change in interest rates will affect asset and liability valuations or the likelihood of defaults among candidates for pre-approved credit card offers. They are doing so, executives and recruiters say, partly because they are realizing that managing risk pays; partly because they're using ever more complex investment instruments; and partly because regulators are nudging them.
Regardless of the reasons, status and salary levels are rising rapidly. Veteran risk managers are getting more exposure to the people who run their organizations than ever before. Business school graduates are starting at $35,000 to $45,000 and doubling their salaries in three or four years.
The hunt for people with risk management analytic and communications skills is getting tougher, said Mick Wets, head of human resources for Fair, Isaac & Co., because "they're in demand and they know it."
The San Rafael, Calif., supplier of credit scoring systems hires experienced risk managers to serve as liaisons between its financial institution customers and its technical staff, providing clients with advice on how to use its software.
Although managing credit risk is often seen as a separate career path from other forms of risk, most risk management positions demand strong quantitative skills.
Typically, financial institutions are looking for people with an undergraduate degree in a technical field, like mathematics or engineering, and a graduate business degree in finance, said John Myers, a partner in Phoenix-based DDJ Myers Ltd., a recruitment firm specializing in asset- liability and treasury management positions.
With that kind of education, a person with a year or two of experience will often make about $50,000, he said, adding that senior risk management executives with large organizations can earn more than $500,000. Signing bonuses are common, he said.
"There's tremendous competition for these people and limited supply," Mr. Myers said. "I'm sure there will be an equilibrium at some point, but it will be later, not sooner."
Since it is unlikely that many people will plan their schooling around the pursuit of careers in risk management, executives said they would look for people with transferable skills elsewhere within the same organizations. Experience in lending and investments and, to a lesser degree, information systems could be useful, executives say.
Categorizing careers in risk management is difficult because each company organizes the work differently. But two of the larger areas experiencing strong demand are consumer credit risk and portfolio risk, involving the exposure of earnings and equity to changes in interest rates. Today, both make extensive use of complex computer models, designed to do statistical analysis of loan portfolios or balance sheets and conduct wide- ranging what-if queries.
The largest organizations are putting mathematics Ph.D.'s to work creating such models, and often paying about $100,000, while most others are employing models purchased from vendors. Still, fairly high-level analytical skill is required to use the purchased models.
Commercial lending risk management stands apart from other credit risk management, observers said, because it does not readily lend itself to examination by computer models. More than in other areas of risk management, said Timothy Chrisman, head of Chrisman & Co. in Los Angeles, commercial banking risk managers must have experience with the products they are evaluating, such as trade finance, asset-based lending or real estate lending.
Jobs are very specialized in terms of type of risk analyzed and in terms of separating number crunching from policy development and monitoring at larger organizations. Smaller organizations ask risk managers to think much more broadly and more like managers responsible for the institution.
The three-person risk management staff at Southwestern Corporate Federal Credit Union in Dallas, a credit union for credit unions with $3.5 billion of assets, is loosely divided into legal risk, operations and compliance risk, and interest rate risk. But Brent W. Smith, the head of the department, said he wanted someone who understood regulatory compliance, investments, check processing, and wire room operations the last time he was hiring.
In a sign of the times, Mr. Smith thought he had the position filled when the candidate opted to go work for another institution.
Several factors appear to be spurring the growth in risk management, including simple recognition that it is good for business.
Risk managers avert surprises that cost money and management time, Mr. Smith said, adding, "You've got to become efficient. And if you don't have surprises eating up your time, you can improve your efficiency."
Along with development of complex derivatives to hedge credit and interest rate risks, institutions are recognizing a need for improved ability to analyze the risk in the derivative investments they are buying.
In addition, regulators have heightened awareness of risk management. For example, after years of investigating banks' exposure to risk in the course of its examinations, the Office of the Comptroller of the Currency formally adopted a supervision-by-risk program in 1995. That made evaluating the quantity of risk exposure in an institution and determining the quality of risk management systems into the cornerstone of its examination process.
Regulators and bankers alike became concerned in the early 1990s when they saw how difficult it was to get an enterprise-wide view from fragmented information systems after mergers and acquisitions, said David D. Gibbons, deputy comptroller for credit risk.
"They had trouble identifying and aggregating their risk levels," Mr. Gibbons said. Some banks discovered they had two or three times more risk in commercial real estate portfolios than they thought they had before they got their systems communicating with each other, he said.
The OCC has defined nine categories of risk for bank supervision purposes: credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risk. Banks are not required to use the same categories in their own management.
Risk management positions are found on corporate staffs as well as within business units. And they range in responsibility from purely analytical to general management.
At Key Bank USA, which includes KeyCorp's credit card, mortgage, education and automobile lending businesses, Mr. McClafferty's former staff of eight manages credit scoring models provided by companies like Fair, Isaac rather than creating its own models.
The group does quantitative analysis of the various loan portfolios to measure the effectiveness of loan-to-value policies or debt-to-income policies or to assess the relationship between profitability and credit losses.
Three staff members mostly dig data out of the company's systems, while five others are assigned to specific functions, Mr. McClafferty said, such as pre-screening mailed credit offers and implementing scorecard models.
With adaptive control, Key Bank USA experiments with different responses to different delinquent borrowers to compare strategies. Depending on a borrower's profile, the bank may send a harshly worded letter very quickly after a payment becomes late or a more gently written letter several weeks later.
Mr. McClafferty said he participated in the development of policies to mitigate the risks that his team discovered, but was not involved in monitoring how those policies were executed.
While headhunters, who typically are hired to find senior level executives, speak of the difficulty of finding people combining years of experience with technical, business management, and communications skills, Mr. McClafferty said the toughest jobs to fill are a bit lower on the career ladder. The people making $40,000 to $50,000 a year with no more than a couple of years' experience are not attending conferences and are not as visible, he said.
He said many of the calls he received at Key Bank were from small, independent finance companies, which appeared trying to impress Wall Street analysts with a strong risk management staff in preparation for loan securitizations.
"A lot of smaller finance companies carry with them a great deal of risk," he said, playing down the likelihood that one would tempt him, though they play a big part in raising the pay scale. Those kind of employers may not offer the long-term security that KeyCorp does, he said, and notorious failures such as Mercury Finance Co. and Jayhawk Acceptance Corp. probably did not listen when their risk managers spoke.
Mr. Stoneman is a freelance writer in Albany, N.Y.