Since the credit crisis, risk management in banks has become a far more heavyweight, far more respected and a far more popular career. If you want to join the risk management fraternity, you'll need these skills:
One all-encompassing theme of the current Investment Banking environment is the tidal wave of regulation that has been sweeping across the industry since Basel 2.5 first appeared in 2009, this was followed by the new Basel III requirements and US Dodd-Frank financial regulations. The new regulatory requirements are far more quantitative and are normally handled by the risk management function.
Before the crisis, risk management was typically highly siloed across business lines and between market and credit risk functions. Recent changes like Basel III have driven together a number of the market and credit risk elements - something that's most apparent in the new counterparty credit risk requirements. Risk managers who are able to adapt to the new multi-discipline requirements driven by regulatory reform will be in high demand.
The independent risk function must be in a position to challenge the trading businesses. Organisations vary in terms of the air cover provided to the risk management function in challenging the trading businesses. In places were the profit centre versus cost centre balance is skewed in favour of risk taking versus risk management then the individual’s strength of character to challenge is essential to ensure the risk function maintains it’s crucial oversight function.
The growth in highly structured and path dependent derivatives prior to 2008 lead to more and more weight being put on the quantitative abilities of the risk management function. As noted in point 1, Basel III also requires a far more quantitative approach to risk than banks have been used to. At the same time, however, there's growing appreciation of the need for a common sense 'qualitative' approach - risk cannot be based on figures alone.
Plenty of risk managers are highly quantitative, but the really rounded risk manager who can communicate clearly and concisely to senior managers without falling back on highly quantitative jargon tend to have a significant advantage. Risk managers need to build a relationship with traders that allows them to challenge without confrontation.
You may have the 5 previous skills in spades, but poor luck tends to be the bullet you don’t see that ends up bringing you down. Investment Bank risk parameters are highly structured and by their very nature probability bounded. What happens outside of those boundaries tends to be very ugly. Dodging black swans is part skill but a lot of fortuitousness.
Peter Griffiths is a director at boutique risk advisory firm Calimere Point.