Total timidity:
That's the real risk

Banking has to be in the risk business, argues SIMON THOMPSON. But, after a crisis caused by banks taking too many risks they didn’t fully understand, is the pendulum now swinging too far the other way?

At the heart of our discussion about banking risk management in this issue there’s an illustration of the gap between the perception and the reality of the greatest dangers confronting professional bankers.

Each major risk category has its own champion. Brian Brodie focuses (p26) on the risks inherent in consolidating vast amounts of data onto single platforms in pursuit of efficiency and enhanced service. “It’s arguably the greatest challenge currently facing any financial institution,” he insists.

To Jason Costain (p24), the primary task is fighting fraud. Technology isn’t just making things easier for banking customers, he argues, it’s also transforming the opportunities for fraudsters.

To regulators (p22), the Holy Grail is a failsafe method to predict and forestall another systemic crisis. Some hope, declares Professor Ian Harper: “We know when the tinder’s dry, but not when someone’s going to flick a match which sends the whole place up.”

To top managers, the main culprit is none of these. “Two-thirds of executives in the world’s largest banks,” we report (p20), “say that credit risk is the primary threat facing their business.” Banking’s challenge here, it is heavily implied, is actually to protect itself from its clients’ most dishonest instincts.

It’s John Thirlwell (p12) who comes closest to the core issue: none of these discrete risks, he acknowledges, is as critical as the over-arching category of operational risk. But, strangely, it remains “something of a Cinderella, the bit that’s forgotten when everybody’s gone off to the ball”.

Thirlwell points out that banking simply has to be in the risk business or it’s nothing. I agree. And, in the aftermath of a crisis caused by taking too many risks that banks didn’t fully understand, the real worry is that the pendulum will swing too far towards total timidity.

Certainly, all risks need to be better understood, better managed and better mitigated. That’s the foundation of banking professionalism, the essence of this Institute’s work. But trying to remove risk from banking simply means there’s no banking industry. For banks, the real post-crisis risk would be a conviction that they should take no risks at all. That really would be dangerous.

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