Risk analysis in the financial sector must become part of the culture says Palisade

This week has seen the head of the Financial Services Authority (FSA) admit that the watchdog did not focus enough on the excessive risks being taken by banks.  In addition a former HBOS employee has confessed that risk managers at the bank were discouraged from challenging business decisions.  In light of the current economic climate and these announcements, Palisade (www.palisade.com) continues to alert the financial sector that it must evolve to embrace risk.

The risk analysis specialist believes that over the past two years many risk departments at financial institutions will have flagged up levels of uncertainty that would have been unacceptable in previous times.  However, the pursuit of generating wealth at all cost over recent years, coupled with a booming economy, will have caused these warnings to go largely unheeded.

Palisade outlines the uneasy relationship between risk managers and the bankers and traders they aim to monitor as the reason behind this.  In particular, traders perceive risk departments to be over-cautious and therefore an obstacle to business being done and bonuses earned.  Combining this with over-riding profit objectives, advice on risk has been increasingly ignored.

This is despite the the sophisticated risk analysis tools available to enable risk departments to 'measure' the likelihood of an event occurring and the severity of its effects.  However, Palisade cautions that the accuracy of the results depends on the quality of the data input – and therefore hinges on the ability of the financial sector to adopt a realistic attitude to risk.

Craig Ferri, managing director at Palisade Europe, explains:  “If we are to avoid another catastrophic meltdown in the future, the risk department must be given more prominence.  Along with intelligent risk analysis tools it must become an integral element of financial institutions.  Clearly this requires a sea change in the profit-culture.”

Palisade stresses that there is no time to waste.  “Whilst it is unrealistic to expect an overnight shift, risk managers are currently in an ideal position to progress the change required, not least because there is currently a window of opportunity during which the appetite for risk is severely reduced,” says Ferri.  “At the moment, people want as much certainty as is humanly possible.”

“No-one would deny that financial innovation should be encouraged.  However, the painful lesson from the current crisis is that it needs to be tempered with a thorough analysis of the risks, as well as the benefits, that new products will offer – a discipline that is essential practise in many other industries,” Ferri concludes.