This time last year, Stephane (a pseudonym) lost his job as an equity analyst covering financial stocks in London. After concluding that he wasn’t going to find a similar job soon, Stephane set off on a tour of world financial centres while he tried to work out what to do next. 12 months later, he’s found a potential answer: risk modelling – or specifically building the internal ratings based (IRB) models that banks use under Basel II and Basel III regulations.
“All that banks want to do now is to play games with their risk weighted assets,” said Stephane, speaking on condition of anonymity. “Basel II and Basel III allow for an internal ratings based approach – banks just have to convince the regulators that their internal models are up to it. As capital requirements increase, these model builders are going to become more and more important.”
In a document issued earlier this year, the Bank for International Settlements outlined the options available to banks for calculating the value of their risk weighted assets. They include the so-called ‘foundation IRB’ approach, the ‘standardised IRB’ approach and the ‘advanced IRB’ approach. Under the advanced approach, banks are able to concoct their own risk weightings based upon estimates for the probability of default, their losses in the event of a default and the exposure of the bank to a default. The advanced IRB approach reportedly produces lower risk weightings. In a world where increased capital requirements are partially dictated by risk weighted assets, guess which approach banks prefer?
Miles Kennedy, a financial services partner at PwC, said Basel III has created a need for banks to recalibrate and further develop their risk models: “Basel III puts a premium on banks’ ability to model risk to the satisfaction of the regulator, with a view to reducing their need for regulatory capital.”
Risk modelers who can build advanced IRB models should be in strong demand as a result, agrees Kennedy. Equally, their jobs should be relatively immune to market conditions.
IRB modelling jobs just aren’t that easy to get
Unfortunately for Stephane, life hasn’t proved as simple as he’d like. Having identified advanced IRB modelling as a growing and redundancy-immune job in banking, he’s having trouble securing an interview. Even though he has long experience of analyzing banks and could easily build advanced IRB models, recruiters keep dumping his CV: “They want PhD mathematicians and people with previous risk modelling experience,” he complained.
Gail Danvers, managing consultant at recruitment firm PSD Group, said demand for risk modellers is “steady” but not crazy. Banks hire quants with three to five years’ experience to work on their IRB models, said Danvers. Salaries typically come in around £70k- £80k.
Kennedy said advanced IRB modelling jobs may also not turn out as robust as they seem. For the moment, banks have an incentive to hire advanced IRB modellers in an effort to massage down their risk weighted assets and related capital requirements. However, Kennedy points out that regulators fundamentally want banks to increase capital no matter what: “The goal posts are shifting. The leverage ratio is regulators’ latest method of making banks increase their equity.through other means.”
Meanwhile, Stephane has given up on an advanced IRB modelling job and is looking for work in regulation instead. “This is a growth area and it’s a job I could do, but recruiters won’t think outside the box – they just look at me and see I don’t have direct experience.”