By DAN REYNOLDS, senior editor of Risk & Insurance®
So, what went wrong?
Banks have risk managers, after all, so what were they doing as the U.S. financial sector careened toward near-disaster these past two years?
Participants at the American Bankers Association Insurance and Risk Management Annual Conference and Meetings in Weston, Fla. had plenty of answers, but the question is, how do we synthesize those answers into true enterprise risk management, not just for banks, but for the entire financial services sector?
At a power breakfast on Jan. 27 hosted by Beecher Carlson, the turkey sausage and fluffy scrambled eggs were tasty. So was the advice given by Armando Falcon, CEO of Washington, D.C.-based Canonbury Advisors, LLC.
Falcon, the former chief regulator of Fannie and Freddie Mac for the majority of the Bill Clinton and George W. Bush administrations, points to a cult of personality in many financial institutions that he thinks has just got to go. One of the chief systematic risk management weaknesses, according to Falcon, exists when the CEO of an institution is also the chairman of the board.
"Having the CEO and the chairman in the same man creates a material weakness," Falcon said; for the simple reason that it creates a conflict of interest for a person to head the board that is charged with overseeing his management.
So how many risk managers reading this work for a company where the CEO is also the chairman? Can we have a show of hands please?
These "cults of personality" as Falcon sees them, coupled with a short-term focus on outsized financial returns, goad financial sector leaders into imprudent actions and boasts about returns that really aren't sustainable.
"The first little lie is what leads you to the second little lie and the third little lie," is how Falcon described it.
You know what else has got to go? How about compensation of financial sector executives that dwarfs, by factors in the hundreds, the average salaries of the rank and file.
That's according to Richard Levick, president and CEO of Levick Strategic Communications, who joined Falcon on that panel in Florida.
"We've got executives who are making 522 times what the average worker makes. We stopped doing that in the 1990s and now we've returned to that," Levick said. "There is no other country in the world where compensation is that out of whack."
Levick said that he wondered, despite having men who call themselves both chairman and CEO, do we really have any leadership to speak of?
One course of action that can be taken is changing the regulatory environment and that was a constant theme in January's ABA meetings in Florida.
The future of the SEC, an organization which many see as being way too chummy with the financial professionals it's supposed to regulate, was one topic of discussion.
"I think that there is a high likelihood that we may see the SEC abolished," Falcon said. Maybe, maybe not; maybe Falcon was just in a particularly dark mood.
In an interview following the breakfast meeting, Mark Tenhunfeld, the senior vice president, Office of Regulatory Policy, of the ABA, seemed to think that more regulation is coming and it may be focused at those dysfunctional, at least from a communications standpoint, financial sector C-suites that we referenced earlier.
"In order to avoid that problem going forward I think the regulators are going to say, and again, particularly for institutions of any size, not so much the community banks yet, they are going to, at a minimum, come out with guidance, and perhaps come out with something more binding than guidance, a regulation, that would have a bank designate an individual as the CRO or the chief enterprise-wide risk manager or whatever the title may be, but whose responsibility is to look across the firm, look at all of the silos and see how those risks are correlated and report directly up to the CEO," Tenhundfeld said.
"If you have a chief risk officer today who went to the head of the shop and said 'I anticipate potential for massive losses in this portfolio or in this line of business,' I have to believe just the fact that banks have been beat up so badly of late, management would take that person very seriously," Tenhundfeld said.
One can only hope.
March 3, 2009
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