Technically, everyone in the bank is a risk manager. Whether you are a trader on a desk or the CEO, you are involved in managing risk. However, we separate certain functions. For example, at every trading desk there is someone independent of that desk who looks at risk management. It's their job to make sure that decisions taken by the desk are within reasonable parameters.
I work in the trading book market risk department, so I deal with risks arising from the market. This is as opposed to risks arising from credit, for example, which would be where people do not meet their obligations. In the markets the risk is that you can potentially make losses as the markets move.
We also manage risks for clients. Let's take the example of a corporate client, say, an Italian car maker that sells to the US market. Their costs will be in euros but their revenues will be in dollars. They may face losses if the dollar depreciates against the euro. But they could sub-contract their risk management to us. We would take that risk onto our books and choose how to manage it.
We do hundreds of thousands of such foreign exchange transactions every day so it is not possible to examine the risk on an individual basis. You have to aggregate them at some level, and the easiest level of aggregation is currency. So you would look at three things: the dollar/euro exchange position in notional terms; the amount of euros clients have asked you to sell them at a given point in the future; and the amount clients need to buy at a given point in the future. From there you can work out your exposure to the risk of fluctuation in the exchange rates.
As a risk management group we give individual traders or trading desks a limit. So we say: "You can trade up to X in dollar euro now". We take several things into account when setting risk limits. First, the liquidity in the market (how long we might have to hold the position during adverse conditions). Second, what are the potential losses we could face? Third, how much does the trading desk or business typically make? Finally, are the potential losses commensurate with the expected profits?
**The financial crisis was partly caused by global risk mismanagement. Whatever went wrong, has it been put right? **
Institutions faced problems because they did not anticipate some of the risks and therefore did not have adequate protection, i.e., sufficient capital reserves or access to capital to cover potential losses. Those misjudgements have been corrected and lessons have been learnt. I think that if you lost billions of dollars and you didn't take action to correct it, then you'd have a serious problem, so most institutions have come up with solutions to those problems. Some may still be in the process of implementing them, but if any institutions were operating in exactly the same way as they did in 2006, I would be very surprised. We are certainly not.
Do you recruit graduates directly into risk management?
Yes, we hire graduates directly into credit risk management but we also run a rotational programme. The people on it move across departments so that they familiarise themselves with the different product groups and the different types of risks: market risk but also credit risk and operational risk. They also spend time with the risk analytics group.
Does risk management require different skills to, say, sales and trading?
Quantitative skills are fairly important irrespective of whether you go into trading or risk management. In both you need to be quick on your toes, able to respond to changing economic news quickly. There are some differences. As a trader you will concentrate on one particular product or market factor. In the role of risk management you need to take a wider view of what is going on in the market. No organization has the luxury of having one risk manager per trader. There's typically one risk manager per 50, 60, 80 or 100 traders. So a risk manager has to monitor many different market factors.