Risk Management

03:50 PM
Andrew Waxman
Andrew Waxman
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No Screwups, Please, We’re Banks

Changing a bank's culture is not going to happen overnight, but having the right tools and levers in house will surely make a big difference over time.

The FX scandal for which six banks just paid more than $4 billion in penalties is just the latest in a series of regulatory failures and banking scandals. It's likely that banks will offer additional billions of dollars as penance for FX and other sins. So maybe they should simply adopt a policy of no screwups. At this point, it would seem to be the easiest way to get back to making money. That is easier said than done, of course. How would they go about doing this?

Three places they might start are hypersensitivity to the regulatory environment, applying incentives to change employee behaviors and execution, and data analytics.

In terms of hypersensitivity to the regulatory environment, it is no longer good enough to be aware of the rules governing banks. Banks and their whole staff need to be hypersensitive to the day-to-day impact on how they conduct business. First, the rules governing banks' activities are changing every day, not just in the US but everywhere. They can fall afoul of regulatory authorities simply by not understanding and then executing compliance with the latest regulations. Ignorance, of course, is no defense.

Not only that, but certain rules in some countries and jurisdictions over some of a bank's entities may conflict with one another. It is impossible for even the most brilliant and aware lawyers and compliance officers to keep track of all these changes. Databases, in combination with big data and rules engines, are essential to ensure compliance. It is no longer just a "nice to have." Regulators, themselves aware of the complexities, are now expecting such tools to be in house with their examinees.

Lastly, it is not sufficient for those with oversight responsibilities to understand the rules. Those working in the front office need to understand them and conduct themselves within them.

The second lever is rewarding behaviors that help institute and support a "no screwups" environment. Traders are able to point to their impact on the bottom line, but it is harder for a really good risk manager or operations professional to do so. The impact of cost avoidance is every bit as significant, but how do we measure it? The number and amount of operational losses is one thing. In addition, there is evidence to suggest that clients are attracted to robust operating environments, where assets are perceived to be safe and well managed from an operational perspective. Shouldn't the folks who have established such an environment share in the financial rewards of attracting new clients?

Those in the front office who either take undue operating risks or establish cultures and practices that lead to operational losses and fines should have to eat those consequences. Where it gets tough, as evidenced by these repeated episodes, is forcing bad actors to change their ways. Too often those in operations and control functions are aware of practices that cut across ethical and business rules but have little incentive to say or do anything. If they run afoul of a big hitter, they are likely to lose their job. Support needs to be introduced to ensure that this cannot happen.

The third lever, data analytics, then should be used to provide data in support of regulatory compliance and identifying good and bad behaviors. In the case of monitoring regulatory changes, it is inadequate if not done in conjunction with identifying the impact of those changes on current business practices. There needs to be a direct mapping of what employees need to stop doing and what they need to start doing. Tools are available to help banks do that.

Data analytics are also critical if incentives are to be applied equitably to reward good and bad behaviors. Take the Bloomberg chat rooms that traders reportedly used to discuss their FX conspiracies. Tools to monitor these chat rooms could likely have been deployed effectively to identify the scandal brewing early on. With the systematic availability of metrics and hard data, proper transparency over negative behaviors could be provided without the need for heroics on the part of control functions.

Changing a bank's culture is not going to happen overnight, but having the right tools and levers in house will surely make a big difference over time.

Andrew Waxman writes on operational risk in capital markets and financial services. Andrew is a consultant in IBM's US financial risk services and compliance group. The views expressed her are those of his own. As an operational risk manager, Andrew has worked at some of the ... View Full Bio
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