Risk management: different industries, different drivers

Some quotes are interesting because of what they say; others because of who said them. The latter applies here: "The debate now is where to set your tolerance for market risk, credit risk and funding risk. Risk can't be eliminated completely, so it's a question of finding the right balance between those three risks."

And also here: "We use the risk-based approach to capture operational risk because this methodology is more accurate. It allows us to formulate action plans to mitigate the significant risks identified."

So, who was speaking? The obvious guess in both cases would be a bank risk manager. And the obvious guess would be wrong.

Musing on the balance between market, credit and funding risk is Peter Bjerge, lead credit analyst at Danish energy firm, Dong Energy.

Formulating op risk action plans is Martine Miet, head of operational risk at Axa Investment Managers.

In a sense, this shouldn't be a surprise. Many energy firms and large asset managers are excellent managers of risk, but they have traditionally focused on market risk in its various incarnations.

Here, we have an energy firm speaking about credit risk and an asset manager speaking about operational risk.

The same kind of evolution happened in banking. Once a formal, process-driven approach to risk management had taken root, it branched out, covering new ground – its dictums were applied to operational risk, counterparty exposures, market liquidity, business and strategy risks. But for most of these exposures, the driver was regulatory capital.

In different industries, though, there will be different drivers. Energy firms care about credit risk right now, because the oil price collapse has made the sector less creditworthy – the default rate for high-yield debt issued by US energy firms hit 5.3% in October. So, it's no surprise the sector would start applying techniques that are used in banking – gauging credit risk by using credit default swap spreads, paying greater attention to concentration risk, employing collateralisation more often.

Asset managers are not facing the same imperative when it comes to op risk. Bank-owned firms have no choice – regulatory capital again – but independent asset managers can afford to be more relaxed. It will be interesting to see how widely the discipline spreads within the industry – or whether it spreads at all.