Risk management held back by lack of clear definition

Risk managers must collectively define the value of their trade to be taken seriously, according to Andrew Smith, chief financial risk officer of UK bank HBOS.

Smith, speaking at a jointly held International Swaps and Derivatives Association and Professional Risk Managers' International Association conference in London this week, said this lack of any coherent definition of risk management is holding back the industry.

He highlighted the lack of consensus, even among the risk professionals in attendance, as to whether risk was an art or a science. He argued that for risk managers to have their business taken seriously, a clear definition of risk management would need to emerge. He offered one: “A set of actions used to contribute towards the likelihood of achieving and surpassing planned objectives over a defined period of time.”

Smith’s talk also touched on the perception held by chief executives of risk management. He argued that for something to be considered important, it must be quantifiable. Only then could the value of savings be fully appreciated, and it is saving and making money that makes people listen.

Good risk management, he said, was a better strategy than increased customer volume. "There is nothing your competitors can do to reverse the effects of your risk strategy, while market share can be won back," he said. But Smith added that a company’s chief executive was likely to see things differently.

Smith concluded that chief executives act according to the advice they receive from those around them paid to influence their decisions. The profile of risk management would be raised, Smith said, when more people understood the advantages of developing their risk strategies and co-ordinated their pressure on chief executives to prioritise risk.

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