eFinancialCareers

The professionals who stop bankers doing anything too rash.

Voice of caution or spoilsport? Risk managers act as a restraining influence on a bank’s risky activities. They ensure a bank is not overexposed to plummeting stock markets or stop huge loans being made to companies on the verge of bankruptcy. They also ensure business continues as normal in the event of operational problems, such as a computer system failure, or disasters like a hurricane or terrorist attack.

The risks faced by financial institutions come in several forms, including:

1) Market risk: The risk that a whole group of traded financial products (eg. stocks, bonds or commodities) falls in value simultaneously, due to outside events such as rising oil prices and terrorist bombs; also known as “systemic risk”.
2) Credit risk: The risk that a particular company or an individual will default on their obligation to repay their debts.
3) Operational risk: the risk that something might go wrong in the day-to-day running of the bank – from computer failures and floods to employee fraud.
4) Reputational risk: The risk that something will happen to damage a bank’s good name, such as a high-profile court case against it or damage by association with a client who has done something wrong; is sometimes considered a subsector of operational risk.

Trends

Of all the varieties of risk, reputational risk is flavour of the moment, although this sector is bigger in Europe and the US than in Australia. Following a succession of scandals such as banks’ involvement in the collapse of Enron, the Texas energy trading giant; Worldcom, the bankrupt telecommunications company; and Parmalat, the fraudulent Italian dairy manufacturer, banks are increasingly sensitive to the risk of sullying their good names by association with dodgy business deals.

The adverse publicity generated from Citigroup’s run-in with the Australian financial services regulator in April 2005, following accusations of insider trading, is a reminder of what can happen if things go wrong. Politicians and lawmakers are demanding more stringent reporting and control mechanisms in an attempt to restore corporate reputation.

With other recent well-publicised events involving one of Australia’s largest banks, the National Australia Bank, sending shock waves through boardrooms across Australia, managing reputation risk is becoming more of a growing concern for the chief executive officers and chief financial officers of the nation’s leading financial institutions.

A 2004 study by accountancy firm PricewaterhouseCoopers and the Economist Intelligence Unit found that banks considered reputational risk the greatest threat to their market value. However, quantifiable risks like credit risk and market risk continued to occupy most of their resources. While market risk was traditionally the most complex discipline in the risk pantheon, that distinction increasingly goes to credit risk. New credit derivative products mean that banks are now able to bundle up the risk that a company will fail to repay a loan and sell it on.

For example, under a credit default swap, someone buys the right (at a discount) to occasional loan repayments from the bank’s customer. This is all very well, but if the customer defaults on the loan repayments, whoever bought the credit default swap has to repay the remainder to the bank. As credit default swaps are freely traded between financial institutions, they can be bought and sold many times during a loan’s lifetime. However, credit derivative products are typically handled by a bank’s derivative sales and trading team, rather than the credit risk team.

Meanwhile, the importance of operational risk has also risen under Basel II, the set of regulations which came into force at the beginning of 2007. The regulations specify the amount of capital banks should hold in case of an operational problem, and outline ways of managing and measuring organisational risk. Operational risk is the fastest growing risk sector in Australia in light of the new compliance regimes – Sarbanes Oxley, Basel II and the Financial Services Reform Act (FSRA).

Roles and career paths

Market risk specialists use mathematical “value at risk” models to work out the maximum amount of money the bank would lose in the case of a particular event, or chain of events, within a particular timeframe. They also work closely with traders to calculate the risk associated with specific trading transactions and typically sit on, or close to, the trading floor.

Credit risk specialists scrutinise company balance sheets and meet company directors to determine the organisation’s financial health. As well as looking at profit and loss accounts, they analyse how a particular transaction affects the company’s solvency.

Operational risk experts review the likelihood of particular risky events taking place and formulate plans in case they do. If you work in operational risk, you could find yourself doing anything from ensuring that computer back-up systems work properly to conducting post mortems on how well the bank dealt with disastrous events in the past. Reputational risk specialists endeavour to manage the bank’s image. Few banks employ reputational risk specialists per se: the role is typically dealt with by the public relations department, the human resources department and/or the legal team.

If you want a career in risk management, it’s a good idea to join a bank’s graduate training scheme. At some banks, risk training is covered by the IT or operations department.

Pay

Risk management isn’t the highest-paying are of banking, but there is good money to be earned, with salaries up to AU$250K at the senior end. Most risk management roles pay graduates between AU$35 and AU$55K, with market risk the highest paying. In a senior role in market risk, you can earn up to AU$250K, with bonuses of 30%–50%. In most banks, market risk specialists, and credit risk analysts specialising in hedge funds will probably earn the most. Operational risk specialists earn the least.

Skills

• Julian Shaw, the head of risk at Permal Investment Management, a fund of hedge funds, and a former global head of market risk at Barclays Capital in the UK, says: “Market risk specialists need strong skills in mathematics (especially applied mathematics and statistics) and finance (especially option theory and portfolio theory), plus above average common sense to figure out the key problems and strong communication skills to explain them.”

• Kevin Jarvis, Division Manager for Robert Half International in Sydney, sees many people moving into risk from an internal auditing background. “It’s seen as the next step from audit – we get fewer graduates and more people changing roles moving into risk. It’s a job that requires a lot of general business acumen.”

• Amanda Williams from Hudson says: “Analytical skills are key to jobs in risk management. There are some courses available at the Risk Management Institute of Australia, and many people do a Masters of Applied Business and then move into risk to specialise. With the new emphasis on corporate governance there are a lot of openings. It’s a hot area and always will be.”