A good 8-page paper on the culture or risk management in financial institutions from Booz & Co. It reminds me of my days on the institutional trading desk which I write about below.
While the risk management function has grown in size over time, it is typically short on top talent. How many former traders actually work on risk teams? How many risk managers combine both strong quantitative skills and a deep understanding of the business? How many board members have worked on a trading floor? Establishing the credibility of the risk function through a deep knowledge of the business and its ever-evolving product requirements would go a long way toward entrenching a culture in which risk professionals are perceived to be on equal footing with the front office, rather than merely support professionals.
Reading this made me think about the time I used to sit on a trading desk with oversight over an institutional equity trading business. After my firm acquired a larger trading business, the toughest time I had was having these new traders believe that I was there to help them and not the bad guy. I walked into a very liberal risk management culture (read: none) so when the Risk Manager shows up and begins putting limits on what they can and cannot trade and then on the size of the positions, I was not the most popular fellow on the floor, but I had a job to do too.
But eventually the guys (and yes, all guys there) began to appreciate that I was there as a watchdog but also as facilitator. They learned that while the firm had daily position limits, if and when they needed more, I was the guy who could make it happen. I appreciated that they could undermine any controls or game the system if they wanted to, so I knew the key was keeping them honest (e.g., more carrot and less stick.) Soon I taught them that if there was a good story (and their usually was for requesting the temporary increase) I could request the approvals from our European parent and get it. This only happened a few times per year anyway so the risk was minimal but it created tremendous goodwill.
It took over a year but evenually the culture adapted and this is one of the accomplishments that I am most proud of.