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By KATIE KUEHNER-HEBERT, a freelance writer based in San Diego with more than two decades of journalism experience and expertise in financial writing

Bank of America Corp. has promoted Terry Laughlin--the cleanser of Countrywide's subprime mortgage portfolio--to chief risk officer, at a time when regulators are increasingly scrutinizing the risk management practices of financial services companies.

"Terry is steeped in the issues that represent the most significant risk we face, and his ultimate transition into the chief risk officer position reflects that and his deep industry expertise," chief executive officer Brian Moynihan said in a statement earlier this month. "While there is more work ahead, in a relatively short period of time, Terry has helped us make significant progress on our legacy mortgage issues."

Paula Dominick, the company's global compliance executive, is serving as interim chief risk officer until Laughlin assumes the position. Risk & Insurance® reached out to Laughlin, but he was unwilling to speak at this juncture.

Laughlin joined Bank of America in August 2010, and in February became the head of its Legacy Asset Servicing, a new repository unit for Countrywide's problem loans. Laughlin previously served as CEO of OneWest Bank, which in 2009 acquired many of the assets of IndyMac Bancorp from the Federal Deposit Insurance Corp. The FDIC had seized that Pasadena, Calif,. subprime mortgage lender in 2008.

IN AN INDUSTRY NEEDING RISK MANAGEMENT

Laughlin's promotion comes at a time when regulators have announced that they are more closely monitoring whether financial services companies are cutting budgets at their risk management departments, in an effort to shore up sluggish earnings in a weak economy.

"As the industry encounters headwinds and is looking for opportunities to cut costs, we're on the lookout to see if they're cutting too deeply into their infrastructure builds, as well as staffing on the controls side," said Michael Alix, a senior vice-president at the Federal Reserve Bank of New York, in a Financial Times article earlier this month

"We haven't seen it yet, but we're vigilant," Alix added.

The increased scrutiny comes after a December 2010 report by the Senior Supervisors Group of international bank regulators, which concluded that, while most financial services companies have improved many of their risk-monitoring systems, they still "have considerably more work to do."

"The effectiveness of risk management practices will be tested as financial institutions adjust their business strategies to meet the continued challenges in the market and the evolving regulatory environment," William Rutledge, the group's chairman, wrote in the report.

TOO BIG TO HANDLE?

No matter the expertise of the risk management team, the largest financial services companies serving far-flung geographies with a myriad of business lines may be just too complex to adequately handle, says Bert Ely, a bank consultant in Alexandria, Va.

"One of the really big questions of large financial companies is whether any management team can really be on top and monitor all the risks that are apparent in the organization," Ely said. "I would say that the jury is still out on that, and there are a lot of skeptics wondering whether that it can be done. That's why there is a lot of talk in trying to downsize and simplify large financial companies, both here in the United States and in Europe."

According to Ely, all financial services companies should view their risk management departments as profit contributors and not as cost centers, to the extent that risk management practices can optimize the company's risk taking and steer it away from activities for which the company might ultimately be "undercompensated."

Bill Githens, president and chief executive of the Risk Management Association, a Philadelphia-based financial services risk management group, agreed that many financial services firms have improved their risk management practices over the past three years, including developing better data-gathering systems to improve the quality of their reporting and self-monitoring.

But Githens stressed the importance of maintaining risk management budgets, even as earnings remain weak.

"This is not the time to cut expenses or to stop investing in risk management," he said. "Risk management is a journey where there's always room for improvement, and you cannot take a detour in the middle of that journey."

July 18, 2011

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