16 September 2008

Sibos conference: Crisis demands fresh approach to risk - Financial crisis caused by risk failure at senior levels

Only a full-scale reappraisal of risk management and an overhaul of capital adequacy regulation can prevent future banking crises, delegates were told yesterday in the first of Sibos 2008’s Big Issue debates.

Bill Rhodes, senior vice chairman, Citi, and David Hodgkinson, group chief operating officer, HSBC, both called for banks to institute independent risk management functions.

“Management must be tough enough not to get into new areas until they fully understand them,” said Hodgkinson. “And it is absolutely the responsibility of top management to maintain the balance between risk and reward,” he said. “The leveraged investment banking model is broken. Capital and funding weaknesses must be overcome. Leverage must be reduced and credit risks must be priced properly”, said HSBC’s Hodgkinson.

Securitisation was vital to the future of the industry, predicted Hodgkinson, as a means of distributing risk. But the taking of significant levels of proprietary risk onto investment banks’ balance sheet would have to come to an end.

“The chief risk officer must have access to the board and report to the CEO,” said Citi’s Rhodes. “We must also have adequate capital reserves. The old saying goes ‘Liquidity kills banks’. At times like these, it’s important to have first, second and third line of defence in terms of liquidity.”

Rhodes also called for a concerted move toward international accounting standards and “international regulatory norms”.

“Policy makers and regulators are perhaps responsible for about half of the problem, but the banks that rushed lemming-like after risk spreads are at least as guilty,” said Professor Willem Buiter of the London School of Economics. “By allowing competitive regulatory arbitrage, they created a soft-touch environment in which names, rather than risks, were regulated,” he said and added that only a coordinated global regulatory effort could address the excessive leverage of global financial institutions.

Full session report

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