Tag Archives: Financial Crisis

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Survey Says? Risk Management Raises Profitability

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A new report from the Economist Intelligence Unit and Oracle Financial Services sheds further light on the elevation of risk management since the financial crisis. The general conclusion is similar to the one we have been hearing ad naseum since a failure of risk management tanked the global economy.

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As stated in “Transforming the CFO Role in Financial Institutions:  Towards Better Alignment of Risk, Finance and Performance Management” (PDF):

In such a challenging environment, financial institutions must now devise a sustainable growth strategy and be better protected against new or emerging risks. To do so, many finance departments are recasting their business processes in an effort to provide better access to information for internal decision-making, risk management, financial reporting and regulatory compliance.
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Blah blah blah. Same ol’, same ‘ol. Rhetoric and platitudes.

Right?

Maybe not.

This report, in addition to re-stating the need for better risk and finance alignment is actually speaking about evidence directly rooted in the bottom line. The execs surveyed are reporting that financial firms are more profitable when these two departments are in sync.

Financial institutions that benchmark themselves well on aligning their risk and finance functions also say they are doing better financially. Among survey respondents, of those who rank themselves much better than their peers at alignment between risk and finance, 60% are also much better at financial performance and 92% are above average. The equivalent figures for those who are average or worse at alignment are 8% and 32% respectively. The benefits are both specific, such as identifying potentially profitable clients, and general, such as providing a greater understanding of the global context in which major strategic decisions are made.

Those numbers seem substantial.

And this is not just a reality in 2011; this was the case all along. Those firms that prioritized risk management the most — not just rhetorically, but by paying big bucks for talented risk managers with decision-making insight — fared much better in 2008 than those that didn’t.

Research shows that at the 15% of US banks where the chief risk officer (CRO) was among the five highest-paid executives in 2006, the proportion of total assets made up by mortgage-backed securities at the time of the crisis was one-fortieth that of banks where the CRO was less well paid.

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There is even a correlation between higher CRO pay and lower stock volatility.

One-fortieth. That’s 1/40th. Or 2.5% if you prefer.

So you’re telling me that companies that committed to paid risk managers who they valued as decision makers to foresee, navigate through and mitigate pitfalls did much better in avoiding risks than those that didn’t? You don’t say?

For the past three years, we have repeatedly been saying that if this financial meltdown isn’t enough to move the needle on pushing risk management up the corporate hierarchy, nothing will be. But as more and more insight like this in unveiled, it’s hard to believe that companies can continue to ignore the obvious: risk management saves — and makes — money.

The Financial Crisis Was a Failure of Risk Management, Says the Federal Government

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We already knew this, but the U.S. Financial Crisis Inquiry Commission has confirmed the fact that the financial meltdown that spurred the largest economic downturn since the Great Depression was avoidable and only occurred because no one involved understood the risks they were taking.

Regulators, politicians and bankers were to blame for the 2008 US financial meltdown, a report has claimed.

The US Financial Crisis Inquiry Commission, tasked with establishing the causes of the crisis, said it was “avoidable”.

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Its report highlighted excessive risk-taking by banks and neglect by financial regulators.

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Only the six Democrat members of the 10-strong commission, set up in May 2009, endorsed the report’s findings.

“The crisis was the result of human action and inaction, not of Mother Nature or models gone haywire,” the report said.

“The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public.

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“Theirs was a big miss, not a stumble.”

The best part will be when nobody learns anything from this and it all happens again in like five years.

Top Ten Disasters of the Past Decade

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Zurich has unveiled its list of the “Top Ten Megadisasters” of the past decade. The usual suspects pretty much (listed chronologically — not by their “overall business impact,” which is the basis for the list).

1. 9/11 – 2001
2. SARS – 2003
3. 2003 U.S. / Canada power outage – 2003
4. 2004 Indian Ocean earthquake and tsunami – 2004
5. Hurricanes Katrina, Rita and Wilma – 2005
6. Financial crisis – 2008
7. China earthquake – 2008
8. H1N1 pandemic – 2009
9. Iceland volcano – 2010
10. Floods in Europe and Pakistan – 2010

I have to admit, I would have probably completely forgotten the 2003 blackout if I was playing Family Feud and had to come up with all 10 — and I even wrote a cover story for Risk Management magazine about it.

Obviously, catastrophes that weren’t included like the Haiti earthquake, Cyclone Nargis and Bam earthquake were horrific tragedies, but the insurance penetration in those areas is so minimal that the ghastly human tolls did not have a large affect on the industry.

Let’s all dearly hope that the next decade is tamer.

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Ninth Ward. New Orleans. Post-Katrina.

Did the Bailouts Create More Risk?

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Some feel the government’s response to the financial crisis may hurt the U.S. economy in the long run. At least that’s what an independent watchdog at the Treasury Department warned.

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The problem is that the issues that spawned the financial crisis have not been addressed — it has been more than 15 months since the beginning of the downward spiral, and though promises of reform have been made, there has been nothing instituted that will help prevent another crisis from happening in the future. Neil Barofsky, the special inspector general for the troubled asset relief program (TARP) said:

“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”

Since the $700 billion bailout by Congress, those financial institutions in the spotlight have grown even larger and have failed to scale back enormous executive pay. Some, including Barofsky, feel that because banks were bailed out in the past, they may take on even more risk, knowing the government will once again come to their rescue.

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Barofsky also had some words concerning the government’s role in propping up the housing market:

“The government has stepped in where the private players have gone away. If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of” artificially pushing up home prices in the coming years. The report warned that these supports mean the government “has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.

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Many housing experts are worried that once the cash infusion from the government runs out, the housing market will taken an even harder hit than it already has. And though the financial aid the Obama administration has offered has helped the housing and financial markets tremendously, a correction of underlying problems is seriously needed, though it doesn’t look as though reform will take place any time soon.