Editorial

Editorial

Arthur Piper - Editor

Good to talk

Having meaningful risk conversations is a key challenge for businesses and their risk professionals. In theory, it should be easy. Risk managers are armed to the teeth with analytical tools and methods to help identify and quantify risks. In many cases, those tools are tried, tested and reliable.

But they do not always work. One of the least welcome strands of news earlier this year was growing instability – followed by actual large-scale failures – in the global banking system. Silicon Valley Bank (SVB) not only showed that inadequate risk management at the top of an organisation can have disastrous results, but it also underlined regulatory failings that most people had thought had been dealt with after the financial crisis of 2007-2008.

Eyes shut

The Board of Governors of the Federal Reserve System admitted in their analysis of the collapse that regulators had taken their eye off the ball. Not only did they not appreciate vulnerabilities at SVB, but they were also slow to act (see Why the banking crisis is back by Michael Rasmussen and William Gonyer in this issue, pages 16-19).

More worrying, however, is that board members of SVB were in the dark about the risks they faced. The bank failed its own liquidity stress tests and only managed interest rate risk for the short term. When risk management procedures turned up the wrong answers, they altered the questions: “the bank changed its own risk-management assumptions to reduce how these risks were measured rather than fully addressing the underlying risks,” the Federal Reserve said.

This seems absurd from the outside, but I wonder how it felt to be working within the kind of corporate culture that prevailed at SVB. During my research for the cover story for this issue, I spoke to Beate Degen, chair of IRM Advisory, which launched recently. The service aims to help organisations improve the quality of board discussions and strategic and tactical decision-making processes and offer other forms of boardroom guidance.

Understanding

She made a distinction that could help risk managers constructively think through the differences of their own understanding and approach to risk to that of board members and directors.

While it is crucial to understand how a CEO sees, say, a long-term investment in expensive safety equipment as a cost when the company is under intense financial pressure, understanding why that is the case is not the same as agreeing with that view. The risk manager’s role is partly to open up a space of both mutual understanding and critical dialogue. At times, those discussions will be difficult. But they are also crucial to prevent organisations playing fast and loose with assumptions about risks that have serious, real-life consequences.