Investment banks: A new culture of risk
The inadequacy of investment banks’ risk management systems was glaringly exposed during the financial crisis. Since then, the industry has sought to understand what went wrong. Will the banks be better prepared next time? Dawn Cowie investigates.
GLOBAL BANK WRITE-DOWNS as a result of the credit crisis are expected to total $2.2 trillion, according to the most recent estimate by the IMF. This is a pretty unambiguous sign of widespread defects in investment banks’ systems for identifying and managing risks during and before the crisis.
Even institutions such as Deutsche Bank that made it through the turmoil without state support faced substantial losses. Speaking at the annual Risk Minds conference in Geneva in December, Hugo Bänziger, chief risk officer of the German bank, said its biggest mistakes were where it did not effectively identify or quantify risks across portfolios of assets.
"Our risk appetite in leveraged finance had nothing to do with our risk-bearing capacity. I have to admit that cost us €3 billion. We weren’t aware of it – not even at board level," said Bänziger. The bank has been through a painful process of analysing every loss of €50 million to understand where it occurred and why the risk wasn’t effectively captured.
The lack of understanding of institution-wide risks and total portfolio risks has been a common failing highlighted by risk managers. Another weakness was the unreliable quality of data provided by business units and the lack of rigour used to interrogate it, including stress tests.