Most risk managers say they saw the risks well in advance of the banking crisis but they were ignored
Most risk professionals saw the “technical factors” that caused the great banking crisis of 2008 “well in advance” but their warnings were ignored, according to a report whose principal author was at the heart of the financial meltdown.
Over half (58%) of the risk managers surveyed anonymously believe there should be an official investigation to establish wrong doing in the banking crisis.
The survey said risk management among regulators, non-executive directors and business managers is lacking. “Those responsible for overseeing and restraining the actions of the executive were not competent enough, not rigorous enough or not powerful enough to do so.”
Only three respondents out of 563 agreed with Gordon Brown that the most important cause of the crisis was “global economic circumstances beyond anyone’s control.”
The survey was conducted by Moore, Carter & Associates and the Cranfield School of Management. Paul Moore, now a director of Moore, Carter & Associates, was the former head of regulatory risk at failed British bank HBOS. He famously blew the whistle on the bank in February 2009, but was dissatisfied with the Treasury investigation that followed.
“Most risk professionals saw the technical factors which might cause a crisis well in advance,” said the survey. The risks, which included easy availability of global capital, excessive leverage and accounting standards which permitted over-valuation of assets, were reported but senior executives chose to prioritise sales.
Continued the report: “That they did so is put down to individual or collective greed, fuelled by remuneration practices that encouraged excessive risk taking. That they were allowed to do so is explained by inadequate oversight by non-executives and regulators and organisational cultures which inhibited effective challenge to risk taking.”
What still needs to change
“The most important area for improvement is the culture in which risk management takes place, starting with the adoption of remuneration policies which discourage short-term risk taking and underpinned by the development of risk management capability among line managers and board members,” said the report. International harmonisatoin of the rules is essential, it continued.
Added the report: “There needs to be more rigorous supervision of the effectiveness of internal risk management, including supervision of the risk management culture and ethics within firms. To fulfill these responsibilities, regulators need to recruit and retain higher calibre personnel.”
It proves that we cannot trust banking executives to govern themselves and that drastic action is still needed, it continued.
“While major regulatory renewal is taking place in the US, the EU and elsewhere, so far we have seen little change. We still have governing systems and political processes which are unlikely to bring about change to global financial structures.”
Weakness of Walker
Commenting on The Walker Review on governance in financial institutions in the UK, the authors said: “It does not outline how the strengthening of governance processes will be achieved. This survey should inform policy makers, regulators, boards, executives and risk professionals alike of the practical steps required if similar crises are to be avoided in the future.”
The report urges regulators to focus much more of their attention on the effectiveness of internal risk management, governance and controls of the firms they supervise.
There is also strong support from the respondents for setting up a professional body which would set standards and regulate the accreditation and conduct of the risk management profession.
