Banking Exchange Magazine Logo

Talent—risk management essential

Part 6: Getting it means providing good tools, respect, and enough pay

Talent—risk management essential

In my prior blog post I discussed Discipline, one of the essential attributes of a strong risk culture, which are:

Vigilance—Being alert to emerging threats and opportunities.

Agility—Deciding and acting in time.

Collaboration—Being able to work together effectively on risk issues.

Communication—Sharing information and ideas about risks.

Discipline—Knowing and doing what is right from a risk perspective.

Talent—Attracting and motivating people who have the necessary risk knowledge and skills.

Leadership—Inspiring, supporting, practicing, and rewarding good risk management.

This time I will discuss Talent—Making sure that you have enough people with the right skills in the right roles to embed effective risk management in the bank’s daily operations and strategic decision-making.

Risk management skill requires both sound analysis and seasoned judgment—neither of which is in plentiful supply. So attracting and retaining talented risk managers is a challenge—and essential.

Risk evaluation requires expertise and experience

Sound risk analysis brings facts, data, and analytic logic to the task of quantifying risks. The days of seat-of-the-pants guesswork in gauging risks is long gone.

It is dumb to make unnecessary mistakes of fact or logic.

For example, there is no way that anyone can use pure intuition to estimate how much money a complex portfolio of mortgage-backed securities will gain or lose under widely-varying scenarios for interest rates and home values. Explicitly modeling the specific structural sensitivities of the portfolio is a necessary step in understanding its actual risks. This requires rigorous training in math and the economics of finance.

While explicit risk modeling is a necessary step it is not a sufficient step, as we discovered in the financial crisis when some seemingly sophisticated models utterly failed.

This is where seasoned risk judgment comes into play.

Handling risk management in reality

All models are simplified versions of reality that depend on many assumptions and on historical data that may or may not be relevant to predicting future events. The limitations of models must be understood and taken into account before decisions are made.

For example, if future interest rate volatility and default rates are expected to be higher than recent history would suggest, adjust the model accordingly. This requires a deep knowledge of business realities, keen foresight, and a willingness to make decisions in uncertain and ambiguous situations.

So banks need people with both sound analytical skills and seasoned business judgment. Not surprisingly, people vary greatly in the amount of each that they possess. Some people are much better at analytics and some are much better at applying judgment.

A few are excellent at both—but they are exceptional.

So banks need people of both types that can work together effectively.

You can’t ignore the human factor

As a practical matter, most bank risk management is carried out by two distinct groups: risk experts with analytical talent; and line managers with seasoned judgment and deep business knowledge. This division of labor is perhaps inevitable in the age of specialization, but failure to manage potential conflicts and miscommunication between the two groups can cause big problems. (See my earlier blog: Moving from NO to YES.).

So, if there is a dysfunctional management structure governing the two groups, it will be hard to attract, motivate, and retain high quality talent. The best talent cannot be fooled for long and they will vote with their feet.

Also, management should have a policy of rotating risk people into the business lines and business people into the risk groups. This “exchange of hostages” can forge relationships of mutual trust and respect that can contribute to better communication and collaboration. Talented people like to work in a organization that allows them to stretch and strengthen their capabilities.

Risk people cannot be effective if they do not get the support and resources necessary to do their jobs. Sufficient investment in risk information systems and risk modeling is a must. The best risk talent will not work in an organization that gives them inadequate tools.

Weave risk into bank’s complete fabric

Management must insist that business line managers explicitly address risks when making decisions or proposing new business. This serves two very important purposes:

Risk management means something. It sends the message that risk management is not just a staff exercise, but a core value of the company.

Risk people aren’t camouflage. It also sends a message to the risk people that they are a vital part of the organization, not just window dressing for the regulators and rating agencies.

To achieve both purposes, avoid the trap of extreme compartmentalization of risk management.

Risk groups need to learn as much as they can about the realities of the businesses. Line managers need to understand and apply the bank’s way of defining and measuring risks.

Both groups need to communicate and collaborate effectively with each other.

And top management needs to make sure all this is actually happening.

Most important, management should honor and reward good risk management, whether by risk people or business people.

This seems obvious, but it is surprising how many banks do not do this.

Booking revenue is generously rewarded but preventing losses or increasing the return on risk is not. You don’t get what you don’t pay for. [Editor’s note: Compliance contributor Jo Ann Barefoot recently discussed the way banks compensate chief compliance officers. To read her recommendations, click here.]

Attracting, motivating, and retaining risk management talent, whether in risk groups or business lines, is vital for long-term success. A bank must provide a healthy and rewarding work environment for those who are, or who can become, adept at managing risks.

Dan Borge

Dan Borge is the author of The Book of Risk and a consultant on strategy and risk management.  He was the principal architect of the first enterprise risk management system, RAROC (Risk Adjusted Return On Capital), at Bankers Trust, where he was head of strategic planning and a senior managing director. Prior to his banking career, he was an aerospace engineer at The Boeing Company. You can also read a review of The Book of Risk here, "A Risk Management Book That Doesn't Make You Snore."

back to top


About Us

Connect With Us



Banking Exchange Interview with
Rachel Lewis of Stock Yards Bank

As part of the Banking Exchange Interview Series we and SkyStem are proud to present our interview with Rachel Lewis, Assistant Controller at Stock Yards Bank & Trust.

In this interview, Banking Exchange's Publisher Erik Vander Kolk, speaks with Rachel Lewis at length. We get a brief overview of her professional journey in the banking industry and get insights into what role technology plays in helping her do her work.


This Executive Interview is brought to you by:
SkyStem logo