Risk management as a value driver?

By Stefan Hirschmann

COLOGNE, 16.05.2104

In general, head office staff are seen only as a cost centre in an organisation. This applies especially to the Compliance Officers and Risk Managers, who are often seen as a ” brakesman ” and ” hinderer “, compared to sales staff. Classically, this is the cultural contrast between the so-called Rainmaker, who sends a rain of gold, and the Risk Manager, who slows down the Rainmaker. The value-added factor of the risk and compliance functions comes up short in this view, but admittedly the concept is also sometimes difficult to explain.

According to a recent KPMG study, the total cost for the implementation and application of the different regulatory measures for German banks is around € 9 billion per year . This is composed of direct costs for equipment and personnel, the FSMA banking tax and the indirect costs of improved equity and liquidity . Based on findings from a KPMG study, in the period from 2010 to 2012 one in every four euros was spent on internal bank projects directly related to new regulatory requirements.

However, this number seems rather small compared to the amount of individual fines levied for compliance violations in the United States. Thus, Citigroup has been convicted of abuse of information practices and fined US$30 million. Due to non-compliance with Iran sanctions, the German stock market is to pay US$152 million. The Royal Bank of Scotland (RBS ) settled a legal dispute with the U.S. Securities and Exchange Commission over mortgage securities by the payment of US$153.7 million. Rabobank paid a total of € 774 million in an agreement with the supervisory authorities to settle a dispute over the alleged manipulation of interest rates. The British HSBC paid US$2.46 billion, inter alia, because of violations of the U.S. Securities Act. The US mortgage loan regulator FHFA called US$6 billion from Bank of America and the US bank JP Morgan Chase agreed to the payment of a total of $ 13 billion to settle a dispute with the U.S. Department of Justice over bad mortgage securities. Comparing these numbers to regulatory costs provides proof that risk management and compliance do indeed represent good value for money!

As a personal amusement, I have made it a somewhat irregular habit to place bets at racecourses on a contrarian basis. Basically, I back only racehorses with regulatory names. The racehorse “Comply or Die ” was, after all, winner of the Grand National in 2008 and won prize money of GBP 600,000. My use of EUR 5 to win produced a EUR 75 profit – an absolutely worthwhile enhancement! The racehorse “In Compliance” finished the 2012 Grand National only in 5th place, but neverthelss still received a prize of GBP26,000. The horse “Risk Taker” came third in a major race in Chester, whereas the German race ” Risky ” has been unsuccessful in his entire career.

Inspired by the successful conference Operational Risk Forum 2014 in Cologne, I placed EUR20 on a horse called “Risk Management” running at Belmont Park the same evening. Unfortunately, on this occasion, ” Risk Management” came in last!
Dr. Stefan Hirschmann is the chief editor of the magazine “Bank” and editorial director of “Bank & Compliance” and “RISK MANAGER “. Until 2005 he was editor of the journal “Current Rating ” .

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