Raroc pioneer now questions use of risk analytics

Dan Borge, who developed the first widely used enterprise-wide risk management system, risk-adjusted return on capital (or Raroc) while head of global research and corporate strategy at Bankers Trust in the 1970s and 1980s, now questions whether analytics have outpaced banks’ actual use of risk management.

Borge, speaking in Philadelphia yesterday at the sixth annual Wharton Financial Institutions Center Risk Roundtable, sponsored by the Wharton Financial Institutions Center and consulting firm Mercer Oliver Wyman, said Bankers Trust embraced risk management at the top management level because the bank was performing poorly in the 1970s and its senior management needed a tool to find out why and pull it back from the brink.

Charles Sanford, Bankers’ CEO, embraced Raroc and risk management generally. He used Raroc to decide how to allocate capital among the firm’s business lines, and to justify investment in ground-breaking businesses like derivatives and secondary loan trading, Borge noted.

Borge said that, today, he sees little evidence that banks are using risk tools in the same way. “I don’t know of any firm where risk management has really affected a strategic decision,” he said. When Borge asked his audience – which consisted of senior representatives of a number of large US regional and money centre banks, agencies and multilateral institutions – if any of their organisations based strategic decisions on risk analyses, the room remained silent.