Editor's letter
Systemic failure is a phrase we've heard a lot in recent weeks, whether applied to internal risk management at Societe Generale or the inadequacy of the UK financial regulatory process in the face of the Northern Rock debacle.
We highlighted concerns about investment banks' risk management in November in a feature on remuneration in financial services. It is of course understandable that greater emphasis is placed on income generation than savings, but as the events of January demonstrate, the activities of traders must be monitored - and, on occasion, tempered - by risk managers who actually wield some clout. Conservative elements within a bank will inevitably vex the sales force at times, but occasional tension between departments is preferable to the situation SG finds itself in.
One of the key observations in our November piece was that sell-side compensation should be based on economic capital methodology, rather than solely on performance. Perhaps unsurprisingly, it was an internal credit risk management specialist at a major bank who said institutions should ask how much money traders make relative to the risk they take.
Another question is that of incentives, both in terms of the remuneration available to risk managers - the level of which will determine the calibre of talent attracted to the field - and ways of making traders more keenly aware of the need to protect their respective banks' credit books. No doubt the experience of SG will concentrate minds for a while, but the banks need to demonstrate that the avoidance of excessive risk is a priority for them, alongside maximising returns.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Shared deposit networks eye ‘$2 trillion’ extra capacity
Following post-SVB boom, loosening restrictions expected to lead to gradual rise
Dispute emerges over ‘ambiguity’ of perp markets
Kalshi execs hit back at report’s findings of regulatory fogginess
EBA brainstorming ways to make capital rules competitive
Watchdog aims to provide advice on future revisions before year-end
FRTB revamp won’t restore models to past glory, risk managers say
US-inspired reform only expected to lead to small boost in adoption, with limited desks on IMA
Regulators must think bigger to tackle tech risks, says Hong Kong SFC
Leung warns AI adoption and recent cyber scares show new threats require global co-operation
Time to let some air out of the banking system?
Watchdogs worry about lowering standards, but policy-makers eye growth – they face a difficult dilemma
Competitiveness mandate for Esma faces uphill battle
European Parliament offers last chance to force Esma to take more nuanced approach
Europe expects FRTB to bite on XVA hedges
Risk Benchmarking: One-third of European dealers fear new market risk rules will have major effect on hedges