5
Banks have been remaking their risk management systems from top to bottom lately, giving them more power and often installing a new chief risk officer to symbolize the change.
But the world's biggest financial institutions just don't seem to be able to keep rogue employees from yanking the rug out from under their pricey risk management procedures.
From multimillion-dollar software to offices spilling over with risk, audit and compliance staff, they have put massive resources into preventing exactly what happened at Société Générale SA, a bank that had been regarded as one of the best risk managers in the world.
“There has been a much greater focus on controls and understanding and managing for risk [recently] than at any time in history,” says John Knapp, director for the Center for Ethics and Corporate Responsibility at Georgia State University.
Ticking financial time bombs, such as asset-backed commercial paper and collateralized debt obligations, have turned the focus to complicated corners of the banks' books that were gathering cobwebs until last year's subprime mortgage meltdown.
Royal Bank of Canada chief financial officer Janice Fukakusa said recently that she spends more time with investors now in this climate of worry than she did a year ago.
One of the questions she's asked by shareholders is “How respected is the chief risk officer?”
“Shareholders, rating agencies, equity analysts – everybody's looking for the risk management more and more,” said Wes Gill, who heads up enterprise risk management for SAS Canada, which sells risk management software to some of Canada's big banks.
But as 1,000-watt flashlights have been shining into every corner of banks' structured credit businesses, the 31-year-old trader who is alleged to have cost SocGen $7.2-billion did so making what the bank called “plain-vanilla” trades.
The issue came to light when a compliance officer found a trade exceeding the bank's limits, it said. The perpetrator had gained crucial experience in the back office prior to becoming a trader, the bank said, offering a rationale for his ability to get around the system.
Nick Leeson, the infamous rogue trader whose actions caused the collapse of London's Barings Bank in 1995, told BBC television yesterday authorities haven't taken sufficient action to prevent these scandals from occurring and banks remain vulnerable. “I think rogue trading is probably a daily occurrence amongst the financial markets,” he said.
While they've never experienced a trading fiasco of this size, Canada's big banks aren't immune to scandals.
Last year, Bank of Montreal natural gas trader David Lee and his boss Bob Moore lost their jobs after BMO's commodities trading group racked up more than $800-million in losses under mysterious circumstances.
RBC found itself highlighted in The Wall Street Journal in the fall after a bank employee alleged traders were improperly valuing a relatively small amount of bonds in a bid to inflate profits.
Both banks said they launched major internal reviews of their risk management practices. In RBC's case, it said it determined that nothing malicious had happened.
“Wherever I've had any minor experiences … there's always been something much more complex than a simple control checking of things,” the former head of one of the big banks' investment units said yesterday. “There's been some collusion with a counterparty or an outside party that makes it almost impossible for an organization to spot it.”
“When I was in banking, we had a lot of very bright people on the trading floor doing things,” SAS's Mr. Gill, who used to work in risk management at one of the big banks. “The challenge was to make sure that your people in risk management were as bright, as qualified – if not more so – to be able to pick this up.”
The former head of an investment bank said: “Someone has to stand back and look somewhat objectively at what the business is doing, and how is it possible to make this much money, and why is no one else making this much money.”
