Banks take risks. That is how they make money. To be competitive, banks also need to innovate, introducing further levels of risk. Risk aversion, therefore, has no place in a long-term growth strategy of a bank (or any company for that matter).
The recent financial crisis was a clear demonstration of the “irrational exuberance” of risk taking in the western banking world. New innovative products were created, billions of pounds of risk were added on to bank balance sheets, and rewards (to the banks at least) were bountiful.
So how can banks align their strategic business goals with their risk taking mandate? Essentially, risk is an inherent necessity in the future survival of the financial services industry, but regulators are making every effort to reduce, eliminate or ring-fence the risks that banks must take. Is there a way forward that can balance most stakeholders – shareholders, regulators, customers, and employees – and where do you begin?
The 6 Cs of a successful balanced diet of risk and reward for a banking institution can be applied to organisations in most industries:
C-Suite Commitment: it starts with leadership and their commitment to a more balanced scorecard of risk taking. Risk has to be an integral part of any financial institutions framework, and as with any reward policy, has to be clearly aligned with the overall strategic direction of the business. Any strategic discussion must include the risks that could be encountered and revenue projections must be amended to reflect them.
Culture: leadership must develop a risk culture for the organization that limits excessive risk and simultaneously rewards prudent risk taking. A culture must also reinforce the penalties of risk exuberance and not pay lip-service to breaches to the controls.
Communication: the tone from the top must continue to reinforce this new culture, embracing clearly defined, managed risk – incorporating carrot and stick. All employees need to understand and be able to differentiate those activities and performances which create rewards and recognition, and those that create the wrong headlines.
Character: if risk is the lifeblood of a bank’s business growth, then individual risk taking has been as the signifier of personal prestige. Compensation for these “casino” traders has vastly exceeded their skills and competency. Transaction profits are booked immediately providing instant gratification. Rewards -and awards -merely fuel their egos and encourage even greater risk taking on the bank. Inherent risks are not recognised or assigned to traders. Accountability- for the whole life of a deal, or the client, or their bank, – is ignored. Banks need to recruit employees that have more of a balanced view and less of a single-minded focus. All employees must be accountable (a prime requirement in any field of talent engagement and performance) for both the risk and the revenues of an opportunity. Discussions on the viability of new business would then produce a much more enriched, wholesome and meaningful outcome.
Competency: a key factor in the formulation and execution of risk strategy is the competencies and confidence levels of the risk and finance staff. And herein lies a dilemma, that we at Consultancy Matters like to call the “confidence gap” – the most dangerous employee of all is the one whose confidence outstrips this/her competencies. They think they know more than they really do and make decisions that are creating a high risk to their organisation.
We deliver risk training and risk assessments that help to identify and quantify that gap, and help to develop a solution. It could be argued that in the past, finance employees have been rewarded on the basis of outcomes based on overconfidence, reckless risks, and pure luck rather than good judgement and base level competencies
Controls: appropriate risk controls within the organisation need to be in place to identify, monitor and manage activity within the new risk cultural appetite and framework. It does not have to be overwhelming or pedestrian. Any bank is like a small city that needs a police force to oversee it. If the culture of the city is to allow anarchy, then a greater number of policeman and laws are needed. However, if the culture is one where rules are recognised and unruly behaviour is never condoned, then a smaller police force is needed. Greater regulatory controls are a direct result of poor self governance.
To survive and grow, risk competencies need to be recognised and nurtured in financial services and banking. It has to move from a taboo subject, to a culture and approach that is embraced, actively pursued – and rewarded. Reward mechanisms must be clearly linked to successful execution of the long-term risk strategy – surely a clearer and sustainable approach to growth?
President & CEO
Consultancy Matters LLC
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