The changing world of risk management in financial services

Citation

Bruce, R. (2004), "The changing world of risk management in financial services", Balance Sheet, Vol. 12 No. 1. https://doi.org/10.1108/bs.2004.26512aaa.001

The changing world of risk management in financial services

Risk is a moving target. Our readers spend a great deal of thinking time working out how they can pin the elusive elements of risk down. They dissect them for the detail. They create action plans for the financial organizations that they work in. They try to express it all in as analytical a way as possible.

The problem is that, like 9/11, sometimes the risks appear to come out of nowhere and all the risk management skills available are not up to the task. Also it is one of those tasks which can never be finished, done and dusted. It is more properly defined as like trying to tack down a tarpaulin in a gale. As soon as one corner is secure another is up and flapping.

So the skill is to ensure that the changing nature of risk is accepted and that enough skill, lateral thinking, and acceptance of change is in place to ensure that most risks are being dealt with effectively.

One of the great helps in all this is the annual survey which the Centre for the Study of Financial Innovation (CSFI), has been doing in recent years. It has become the bellwether of risk in the financial services sector. It does not rely on its own analysts to assess where future risks are coming from. It goes out and surveys the industry on its views. Then it synthesizes the whole project and publishes its findings. The result is riveting and we are very pleased in this issue of Balance Sheet, as we start the new year, to have David Lascelles, a distinguished director of the CSFI, talk us through the latest survey.

"Risk management", he says in his article, "is now the biggest game in town – or more precisely the City". And he puts his finger on the reasons. "This is not simply because times happen to be hard with balance sheets and earnings under stress", he says. "It also has to do with complexity: there is a lot of risk about, and more of it coming all the time".

Last year it was credit risk which took the top spot in the chart of what the CSFI calls the "banana skins". This year it is complex financial instruments, particularly credit derivatives. The point that Lascelles makes is that traditionally the risks that the business world identified were relatively vague things, like the economic outlook. Now they are specific and complex. Who would have thought, as he points out, that regulation would one day be seen as a risk? But it is.

And that one strange turnaround is highlighted in another article, this time from Sheenagh Gordon-Hart of JP Morgan. In an extremely clear analysis of Basel 2 she suggests that the global consensus is likely to break down. For one thing the strains of the European Union and the USA having to follow different implementation models are going to hit global institutions hard.

But Basel is not the only issue which risk managers are going to have to come to terms with in the year ahead. Chris Mundy, in his challenging article on "21st century trends in risk Management", tracks another change. Ten years ago and through most of the 1990s we would have been talking about treasury risk. Now, when risk is discussed at board level, the talk is about behavioral risk and where the competitive advantage can be gained. And adding to this extensive analysis of the way that risk management is changing Jon Purr of SunGard Treasury Systems suggests that CFOs are now turning to cash as the key to assessing the risk of investment decisions.

The world we now look at is one where volatility has become the way of life. Eric Melse from MARC, the Maastricht Accounting, Auditing and Information Management Research Center, provides a guide to momentum accounting. Arlette Wilson and Jefferson Jones, of Auburn University, provide a guide to how the new rules on disclosing special purpose entities could help or hinder users of financial reporting information.

George Littlejohn, the doyen of City analysts based in London, shines his penetrating light on a sometimes forgotten issue. After all the corporate governance reforms which have swept into place after the tidal wave of corporate scandals in the American marketplace no one has really looked at the issue of shareholder voting. Littlejohn takes this arcane world apart and shows not only how it works but also suggests how change may be coming to this opaque corner of the financial sector.

Meanwhile our regular columnists provide the helpful analysis which is their allotted task. Bill Robinson of PricewaterhouseCoopers turns up some remarkable numbers amongst the pensions industry and provides an analysis which turns conventional wisdom on its head. Michael Mainelli of Z/Yen looks at how issues like corporate social responsibility should be measured and Matthew Leitch brings help to many a beleaguered risk management professional. When people talk about embedding value the rest of the world groans inwardly. They know that it only means hard work for questionable benefits ahead. Leitch understands this. And he provides a swift guide to how it can be achieved without all the time-consuming flannel which most companies suffocate beneath.

All in all this issue of Balance Sheet is intended to act as a comprehensive primer for all that professionals in the asset and liability management and risk management fields need to understand as they face this year as it unfolds.

Robert BruceEditor