British roulette – the risk control system

Two hard lessons abound from analysis of recent bank implosions. First,
neither our banking system, its regulators nor the government paid adequate
attention to the extent of risk inherent in the activities that happened to
contribute so much to our GDP. Second, as a result, some risk officers were not
taken seriously, or were summarily ignored, when warning their boards about the
risks contained in lucrative business lines such as mortgages and credit
products.

Now questions hang over the entire system of risk control. Fingers point not
only to CEOs and chairmen, but to CFOs, to whom risk officers often report. As
CFOs have become strategy partners, they are often deemed the natural choice for
the risk job, or at least to have the risk director reporting into. But this has
exposed serious risks.

Split roles
In January, Anglo Irish Bank’s FD Willie McAteer, who also served as chief risk
officer, resigned after chairman Sean Fitzpatrick admitted concealing euro 87m
in personal loans he took from the bank, leading to its nationalisation. The
bank will now split the roles of FD and CRO and appoint someone externally to
take up the risk job with “experience of international best practice” to bring
“a comprehensive approach” to the “key area” of risk management.

Risk advisers acknowledge the potential lack of independence and the chance
that a clear view of all the risks could be occluded by one person managing
these two roles. “Large companies haven’t seen the need for a dedicated risk
person at board level. There has typically been a risk person reporting to the
CFO and, naturally, the CFO has a grip on those issues,” says James Maxwell, a
senior adviser in the risk consulting practice at Marsh.

HBOS’s ex-head of risk Paul Moore alleges that his attempts to warn the board
in 2004 of manifold risks to financial stability from the speed at which it was
growing were ignored or thwarted. He claims that former CFO, Mike Ellis ­ a
Halifax veteran of almost 20 years ­ prevented his words from being properly
minuted after meetings.

In the bull market, many saw risk as something just to make money from rather
than to also carefully mitigate, while the notion of gaining proper
understanding of those risks was lost in the undertow. Bill Connell was global
FD for a business unit at BOC in 2001 when he accepted his board’s invitation to
become director of risk management for the gas transportation group. “My CEO
said we could not achieve our objectives without taking more risks and he wanted
to ensure they were properly managed,” he recalls. It seems few in the financial
services industry genuinely wanted this too.

CFOs are well placed to establish a more lucid, less suicidal approach to
risk and reward.