Calling for proper risk behavior to avoid another crisis
Simple valuation gains are again seen in the equity
markets as a prime real estate markets bear little relationship to fundamental
economic developments. The values are once again soaring, while world trade
is stagnating. US growth over the past 12 months has been less than 2%,
yet in the same period the S&P 500 stock market index, has gained about
17 %. There is scant real growth across most of the Eurozone and in Japan.
When money is cheap and abundant, it
is in the nature of financial services operators to reach for yield. Experience
shows that oversight must continually insist that banks and financial
institutions must promote prudence in risk taking, as a core cultural
value.
Imprudent risk behavior
According to The Financial Times the rapid rise of subprime lending in
the US to finance used car purchases by non-creditworthy customers. Another
warning signal came from The Bank for International Settlements; 40 per
cent of syndicated loans are to sub-investment grade borrowers, a greater
ratio than in 2007.
The extraordinary amount of liquidity created by central banks and the
prolonged low rate environment has forced many financial firms to seek
risks in their search for high yield. If the risk management process and
procedure are performed prudently; the lessons from the fundamental causes
of past financial crises will be adhered to.
Quantitative issues of capital and liquidity
Therefore, senior managers and boards at such institutions need to put
more emphasis on traditional risk management and risk culture. Regulators
and supervisors should focus more directly on risk management culture
and institute permanent changes in this area. Their ability to do this
may be compromised by their focus on the quantitative issues of capital
and liquidity, frequently at the expense of the no-less important qualitative
matter of risk culture and behavior.
The Chinese economy does appear to be growing in line with the government's
objective of 7.5 per cent; this is due in large part to the increased
levels of credit growth. As a result, bubbles are surfacing in the hot
property markets. The lightly regulated shadow banking system is also
expanding rapidly, while mainstream banks continue to maintain high lending
levels to state-owned enterprises and municipalities.
Specific issues of banking misconduct
On a global basis, managers of some financial firms are not sufficiently
curbing imprudent risk-taking. To some degree they feel the competitive
pressures consistently to produce better quarterly results. At the same
time, many management and board risk committees are still not properly
equipped to oversee risk management and to change the prevailing culture.
Another grave concern is that the European Central Bank is focusing on
key capital, liquidity and other metrics while paying insufficient attention
to risk behavior as it conducts stress tests of major banks.
These are dangerous indicators that there is insufficient focus on the
broader risk issues related to the current reach for yield that could
pose future systemic threats.
Several of the above issues (Risk Management, Doing business in China,
Compliance in the financial services industry) will be dealt with at the
8th annual European GRC Summit on the 22-23rd September at the confederation
of Danish Industries.
