Bankers Trust Revamps Risk Advice Group

Bankers Trust has created a new risk management products and services group, merging its derivatives, merchant banking and risk management advisory departments into a single division.

The bank's senior management views the reorganisation as a means of "bringing greater cohesiveness to our many risk management businesses and allowing us to better serve our clients," according to an internal memo from Charles Sanford, Bankers' chairman, and Frank Newman, its new chief executive officer.

The combined group will be led by London-based executive Yves de Balmann. He will continue in his previous roles as chairman of Bankers Trust International and co-head of Bankers' global investment banking business.

Under the new organisational structure, Bankers' risk management advisory (RMA) group will continue to be managed by Lee Barba from Bankers' corporate headquarters in New York.

Alex Frick moves to New York en route to his new position in London as Bankers' global derivatives chief and head of its transaction development group.

Bankers' 25-odd dedicated RMA consultants operate out of offices in New York, London, Tokyo and Singapore. As well as these consultants, the group assembles teams for specific clients and projects that may include both internal and external risk personnel.

"Each customer assignment is different in some way, shape or form," says Barba. "We add technology, operations or whatever additional specialised skills are needed, based on the assignment."

Bankers' RMA group has been providing risk management advisory and consulting services to a global client base for nearly five years now. More recently, JP Morgan (RMO, December 4, 1995) and Merrill Lynch (RMO, December 18, 1995) have launched similar risk management advice divisions for clients.

Three stage process

The RMA group's advisory assignments typically progress through three stages, says Barba: identifying risk factors; suggesting risk measures and means of collating data; and ensuring managers have sufficient knowledge to interpret these measures and devise risk management strategies accordingly.

Barba says the RMA group's independent fee-based consultancy is a natural extension of the expertise Bankers has developed as pioneers in the derivatives markets since their inception over ten years ago.

The advisory side of Bankers' business has grown rapidly over the past year or so, he adds.

Barba believes that Bankers' RMA group distinguishes itself from its competitors, by offering an enterprise-wide perspective and extensive on-site reviews of a client's operations as a standard part of its service.

Moreover, Barba says Bankers offers its clients the Raroc 20/20 risk management system and can act as a general contractor in implementing company-wide risk management technology for the bank's corporate clients.

Members of Bankers' internal risk management department originally developed the Raroc (Risk Adjusted Return on Capital) concept in the early 1980s. It has been using the concept to evaluate and manage its businesses ever since, says Barba.

In fact, Raroc's development led to the RMA group's creation, says Barba. Back in the 1980s, Bankers was regularly outperforming its peers and Raroc received an initial round of favourable publicity.

As clients called in inquiring about Raroc, Bankers' own risk manager, Don Mudge, would refer them to other risk management experts within the bank. They soon realised that companies were willing to retain Bankers as an advisor, "to help them think through these issues," says Barba.

Keeping secrets

Client confidentiality is an important issue for risk management consultants. Barba says the bank has "firewalls" in place separating the RMA group from other bank departments. These function along the lines of those applied between a bank's mergers/acquisitions and trading areas.

Customers are asked at the outset about the degree of confidentiality they require. This is then written into their contracts with Bankers.

"The risk management advisory group is not associated with any trading or marketing activities of Bankers. The information we are privy to will not be shared with anybody, unless the client so desires," says Barba.

Despite Bankers' involvement in two of the earliest instances of large-scale derivatives losses - the Proctor & Gamble and Gibson Greetings cases - demand for Bankers' risk management expertise remains strong, says Barba.

He adds that the bank recently licensed Raroc 20/20 to Chrysler Motor's $12.5 billion pension fund. Shell Oil has also engaged the RMA group to provide a range of risk information services for a new natural gas company it is forming along with the Tejas Gas Corporation.

And Abbey National Financial Products, the derivatives subsidiary of U.K.-based Abbey National, outsourced its middle and back office derivatives operations to Bankers after the collapse of Baring Brothers, Abbey's former partner in the venture.

"As the derivatives market matures, there have been, and are going to be, problems," says Barba. "It has become fairly common for these organisations to bring in outside help. From a broad perspective, I view such problems as indications that the market is moving into another phase in its development."

Moreover, Barba says the growth of risk management services groups in banks is a positive development for both the derivatives market and overall economies worldwide.

"There are a lot of change taking place in the markets. I think we can participate in a positive way by leading efforts to advise and educate clients in understanding the nature and magnitude of their risks. I think that's healthy," says Barba.