Market risk capital, FRTB and mental health risk

The week on, May 30-June 5, 2020

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EU Parliament ‘likely’ to allow market risk capital relief

MEPs propose allowing supervisors to temporarily exclude Covid-related backtesting exceptions

Regulators and banks clash on FRTB capital impact study

Basel and EBA call out two banks for using “overly conservative” survey assumptions

Mental health: the new frontline for risk management

Rise in stress and anxiety among locked-down staff could open up banks to range of risks

COMMENTARY: The invisible pandemic

Financial institutions have made the physical health of their employees a high priority since the start of the pandemic. Even after offices reopen, returning workers will be faced with dispersed desks, shift-working patterns, mask requirements, handwash stations, meeting bans, regular health and temperature checks, and a barrage of other prophylactic measures aimed at catching new infections before they spread.

But, as discusses this week, mental health should be given at least as much attention.

Society isn’t always good at taking mental health seriously. The worst at it tend to be hierarchical institutions with an ethos of competition, which value toughness and aggression. The armed forces of many countries exemplify this. Only after far too many servicemen and women had suffered from post-traumatic stress disorder did military health systems start to act effectively to address the problem. Other stressful occupations – including, ironically, emergency medicine – have yet to come up to the mark.

Financial institutions can fit this mould as well. While their employees are unlikely to encounter physical trauma, financial companies still need to take a hard look at their approach to stress and mental health, for reasons of risk management as well as simple humanity. It’s particularly important now – with workers isolated at home, their colleagues and managers are less likely to notice signs of impaired mental health.

For a large minority, remote working itself is an additional source of stress. While 75% of the employees of one major bank said it was similar to or better than working in the office, 25% had sharply negative views. Added to this are worries around employment security and financial prospects, and the chances of catching Covid-19, or a family member catching it, as well as the increased workload for many staff trying to handle higher trading volumes, volatile markets and equally worried customers.

The risks associated with mental illness are many. Inadequate precautions may leave employers open to litigation. Stressed or mentally unwell employees are more likely to make operational errors. They are more likely to mismanage their subordinates, indirectly creating more risks. Concern about their financial or personal security – whether justified or exaggerated – may even tempt them to commit or collude in fraud or other financial crimes. If they reach the point where they have to leave work, their absence is likely to be much longer than for a physical ailment. Permanent absences mean loss of valuable experience and skills, and the laborious and costly process of hiring replacements.

While the human resources departments at some banks have been responding well – hiring mental health nurses, for example – they can’t be the only ones to act. Every manager is a risk manager, so the cliché says, and it’s as true here as anywhere else. Great managers will be learning from their experiences during the pandemic: their teams will as a result be happier, more productive and more flexible as they return to more normal patterns of working. Good managers will simply be doing their best to support their employees during a period of unprecedented stress: their teams will endure the pandemic in reasonable psychological shape, perhaps even with heightened respect for their leaders.

Bad managers will follow their instincts to pile pressure on their workforce: the result will be lower morale, higher rates of illness, more operational risk losses and the destruction of their employees’ trust, unnecessarily worsening the impact of the pandemic. The companies unfortunate enough to have them don’t really have managers as much as Covid collaborators.


Faulty data led Wells Fargo to overstate its operational risk capital charge for the fourth quarter of 2019 by $5.2 billion, raising further questions on the soundness of the bank’s op risk management. In its regulatory filing for the first quarter, the San Francisco-based lender revised its op risk-weighted assets (RWAs) amount as of Q4 2019 to $338.7 billion. The previous filing had pegged the amount at $403.6 billion, 19% higher.


“I think most people within banks haven’t got a bloody clue how bad this is going to get” – A former regulator

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