12 April 2006

CRO Strategy: Balancing Risk Across Functions...

RiskCenter (04/04/06) ; Kloman, H. Felix
At a recent Global Association of Risk Professionals (GARP) conference in New York, risk managers highlighted the importance of accurate data being provided to the appropriate decision makers in order to make the best decisions for a given situation, and risk managers also noted that they needed to be independent and objective at all times. Risk management tasks should not be absorbed by finance, accounting, or compliance functions, according to experts, because balance is needed between those functions and the risk managers' function as an educated "fortune-teller."

Chief risk officers (CRO), for instance, should be familiar enough with operational functions, while still remaining outside the internal politics of those functions, allowing them to make educated and objective decisions. Panelists at the conference touched upon the learning experiences they had from risk management mistakes and how they turned those mistakes into opportunities for their firms. For risk managers in the banking sector, Basel II is the latest challenge, especially when it comes to allying risks with capital holdings and the disclosure of how those calculations and decisions were made.

CRO's today are coming from more diverse backgrounds than from years past where they may have lived most of their careers in Finance or Internal Audit. Educated fortune tellers are a thing of the past as new tools, systems and sensors provide the modern CRO with new insight. As new tools are introduced to financial institutions to assist them with creating and mining loss event data, the regulators will be watching. What methodology and frameworks are acceptable? What process was utilized for critical calculations?

Lenders that are not banks or owned by banks--and therefore not subject to FDIC rules--are regulated by states. With the growth of these aggressive and potentially deceptive lending practices, state regulators have come under pressure to issue new rules or guidance to ensure that these "exotic loans" do not continue unchecked.

A Chief Risk Officer needs to be active with both state and national associations to keep in touch with the guidance that may be forthcoming.

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