The anonymous confessions of a risk manager in this week’s Economist are well worth reading:
The focus of our risk management was on the loan portfolio and classic market risk. Loans were illiquid and accounted for on an accrual basis in the “banking book” rather than on a mark-to-market basis in the “trading book”. Rigorous credit analysis to ensure minimum loan-loss provisions was important. Loan risks and classic market risks were generally well understood and regularly reviewed. Equities, government bonds and foreign exchange, and their derivatives, were well managed in the trading book and monitored on a daily basis.
The gap in our risk management only opened up gradually over the years with the growth of traded credit products such as CDO tranches and other asset-backed securities. These sat uncomfortably between market and credit risk. The market-risk department never really took ownership of them, believing them to be primarily credit-risk instruments, and the credit-risk department thought of them as market risk as they sat in the trading book.
I’m interested in the fact that the author of the article is anonymous. There’s nothing here which isn’t well known and accepted in the banking community, and it’s hardly news that any bank which has taken billions of dollars in write-downs had weaknesses in its risk management systems.
If the author of this article had been identified by name and institution, that would have been a sign that the bank in question is really learning its lessons. The fact that the author feels the need to be anonymous, however, signals the opposite: that the bank doesn’t want to admit to weaknesses in its risk management, even now.
For all the areas within banks which have been hit hard by the credit crunch, corporate communications has generally remained unscathed — despite that fact that they’re still instinctively playing defense rather than getting out there and showing the world how the bank has truly changed. When an article like this appears with a byline attached — that’s when we’ll know that the culture of the bank has really internalized the lessons of this crisis.