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How poor risk-management techniques contributed to the subprime mess.
Avital Louria Hahn, CFO Magazine
March 1, 2008
Thanks for the article, including all the ingredients of successful and less successful recipes: -Capital allocation principles -Individual compensation principles -Regulations (Basel II and such) -Structure & process of risk management -Culture It is amazing that leading banks such as Citi and UBS are now revealing plans that capital should be allocated to businesses within the bank based on risk-return considerations! Back to the basics of first semester economics ?. Individual compensation principles: This would be worth a separate article. Nothing drives behavior and culture as much as compensation models and philosophies. Credit Suisse so far has announced to change the system to a multi-year bonus bank, with the risk to lose bonuses earned in prior years. Has any other bank announced similar changes? Regulations: Mostly deal with the last crisis, never prevent the next one?. Important to a point, but more regulation and more disclosure rarely help. Buying a house in the USA requires signing countless legal size forms with risk disclosures. But quite obviously doesn?t prevent unsound property financing at the source! Structure and process: You give examples that worked and that didn?t work with the same or similar structures. The CRO should directly report to the CEO, and have direct access to the board. Managing risks is the flip side of managing business opportunities, both must be balanced on highest level. Culture is the key issue! All processes and structures will fail, if the guy(s) at the top do not set the right priorities. Is it coincidence that the banks with the biggest losses were (are) managed by the chairmen least challenged by their boards (O?Neal, Prince, Ospel)? I don?t think so!
Posted by Peter Stiefenhofer | March 09, 2008 09:28 am
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