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Federal Reserve Board Governor Randall Kroszner urged institutions to address shortcomings in their risk management structures. Risk management shortcomings need to maintain stability for the financial system as a whole, he said. “There can be no real strategic management in financial services without risk management."
In a speech to the annual conference of the Risk Management Association, Kroszner said many firms have failed to include adequate risk assessment as part of their overall corporate strategies. A shift could require fundamental changes from some firms, he noted. “Assessing potential returns without fully assessing the corresponding risks to the organization is incomplete, and potentially hazardous, strategic analysis,” he said.
Institutions must examine longer-term implications of funding and liquidity, and begin to build those into the overall strategic plan for their organizations, he said. “There may be less opportunity to pursue activities that were quite prolific under the previous "originate-to-distribute" model, such as securitizations, given current disruptions or longer-term uncertainties about the reliability of market liquidity”, Kroszner noted. Also collateralized debt obligations or structured investment vehicles may not be as viable in this new environment, he said.
Compensation schemes should take into account the longer-run performance of the portfolio or division in which the employee operates, he noted. “Perhaps most importantly, such a compensation regime must give the appropriate incentives to take risks fully into account during good times, when many often underestimate longer-term risks.”