Question

As an employee of a US based bank, you have just been posted to Brazil as Head of Risk Management.   What additional training/experience do you need to have to be able to excel at this position? Why might some of the risks you face “different”? (10 points)

Answer 1

RISK MANAGEMENT

In the financial world, risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment, such as a moral hazard, and then takes the appropriate action (or inaction) given the fund's investment objectives and risk tolerance.

Risk management occurs everywhere in the realm of finance. It occurs when an investor buys U.S. Treasury bonds over corporate bonds, when a fund manager hedges his currency exposure with currency derivatives, and when a bank performs a credit check on an individual before issuing a personal line of credit. Stockbrokers use financial instruments like options and futures, and money managers use strategies like portfolio diversification, asset allocation and position sizing to mitigate or effectively manage risk.

Skills and training for Risk manager

1. Financial acumen

Even if your Risk Management focus is outside of market risk or credit risk, you will have some degree of exposure to numbers. The sharper you are and the more used you are to working with financial tools and looking at numbers the better. However, having financial acumen is more than just understanding numbers. The ideal risk manager must also understand and master the different financial indicators which are tied to the firm’s assets, business lines, platforms, regions, markets, regulations and stakeholders. Additionally, depending on seniority, the risk manager might also need to manage the department’s P&L, time, resources and funding. Moreover, risk managers must sometimes translate not very objective concepts and risks into specific and measurable items, such as key risk indicators (read more in KRI). Mastering numbers enables a risk manager to make sound and quick decisions. Pursuing financial education and skills is an evermore criteria for success both in your career within Risk Management and also valuable for your organisation.

2. Analytical skills and an eye for detail

In our experience, whatever the category of risk you specialise in, as a risk manager you must possess analytical skills and have an eye for detail. But as discussed throughout this article, if you ambition to go up the organisational ladder and reach, for example, the CRO role, you must broaden your scope and be able to constantly shift between the trees and the forest. The more you go up in your career, the more you will have a directing role, managing wider initiatives and above all, managing people. It is therefore crucial that you keep focus of both the broad aspects of your work (e.g. your firm’s business objectives, your department P&L and the firm’s potential top risks) but never losing sight of smaller details that happen on the day to day. You will delegate mostly but your sharp analytical skills and eye for detail, combined with the required abstraction to look at the big picture, will help you flag urgent smaller situations where you will need to step in. Check our Risk Management Books section to browse the existing books, some of them covering this topic.

3. Industry and Market knowledge

Along with the ability to understand broad business issues, the ideal risk manager is comfortable and knowledgeable of the industry he operates in, being it Finance, Insurance, Energy, Retail, just to name a few. By understanding well the industry and market where the firm operates, the risk manager will be much better equipped to identify the posing risks. Above all, the risk manager will have a better notion on how to rank, score and group any potential risk for the firm at a given time. Focusing specifically at financial services industry, nowadays it is normal that a an experienced risk manager or CRO have understanding of topics such as:

• corporate governance;
• enterprise risk management;
• information and security risk;
• market and credit risk;
• regulatory risk;
• operational and technology risk;
• business continuity management.

However, experience in a particular industry can also be helpful if it relates to the sector in which you wish to specialise your risk management role. In summary, an experienced risk manager or potential CRO should be proficient in a specific discipline, such as market risk, credit risk or operational risk, yet with a good knowledge of broader risk issues and regulatory developments.

It is well known that firms seek candidates who understand how global financial markets operate. Former traders or people with trading floor exposure in previous roles are well regarded by hiring managers. With new products and trading strategies being introduced in real time, risk managers must be able to understand the trade straight away, as well as the conviction of the traders or portfolio managers, so that the risks are fully understood. Individuals with trading floor experience are highly valued at investment banks, finance boutiques, brokerage firms, and hedge funds, where the risk exposure is potentially larger and risks are significant.

4. Ability to endure and work under stress

Why do some people thrive under pressure while others simply can’t cope? The key point is how an individual responds to stress. Some people are essentially emotional dealing with stressful situations, while others can keep focus and respond with their rational assessment. It is a fact that two individuals with the same training, exposed to the same stressful situation, can have totally different reactions and hence a different resulting performance.

5. Technical skills, negotiation skills and the ability to influence people

This is many times a tricky and wishful mix. How many professionals have you met that have great technical skills but are a complete disaster when dealing with people? Or perhaps the opposite, they are great people and have a permanent positive aura around them, everyone likes them and even feel special when in their presence. But when things get more technical in meetings, they become silent or even make you feel a bit embarrassed by the lack of knowledge on topics that they should be comfortable with. In general, we’ve found that it’s easier to develop the technical skills than the soft skills, which most likely is related to personality and harder to change. Keep these factors in mind, as you develop and progress further in your risk management career, the more skilled you must be dealing with people, negotiating everyday and influencing people towards a given goal.

The ability of influencing people is also a very important trait but not everyone has it. Above all, the ideal risk manager or CRO must know to listen and to inspire people. These are two skills that any good leader must pursue.

6. Good communication and presentation skills

This point is tied to the previous one. In the last decade, firms have determined that ideally risk managers should be educated in quantitative finance. But they also should be experienced in trading or a having had been exposed to a front office function. They must also be able to convey complex financial products and risk management concepts, practices, and processes to senior less technical audiences, including front office directors, senior management and the board of directors. As board of directors make an effort to have Risk Management as a regular topic in the agenda, it is very common for risk managers to be called upon to summarise the various risks that the firm is exposed to, and producing actionable outcomes that can be followed up at the executive committee level by order of the board of directors or the risk committee. Strong interpersonal and communication skills are imperative for risk managers to be successful.

7. Holding academic credentials in Finance and Risk

When scanning a candidate’s CV, firms seek risk managers who have strong academic finance or mathematics/quantitative credentials. Many quantitative risk managers have PhD’s in physics, statistics, or computer science. But top firms seek individuals with strong academic credentials in finance. MBA’s in finance, ideally having rigorous courses loads in quantitative finance, from top universities.. This always gets the attention of recruiters and hiring managers. Specific Risk Management academic credentials are also sought these days.

8. Strategic thinking capability

Solid risk managers must be forward-looking and strategic minded, having the ability to understand potential risks for the firm, both at departmental level as well as in a wider firm perspective. The head of Risk Management or CRO must be able to keep pace with the quick and volatile nature of financial markets, . Their function, while by nature a control one, should also be of assisting the front office staff and senior management to deliver solutions that align with business objectives as well as obeying risk safeguards. This aspect is especially relevant in credit risk and development of structured products, where credit risk managers are often involved in the structuring process having to ensure that risks are adequately quantified and hedging strategies put in place to mitigate any potential risk materialisation.