Moderator: John Shain, President, Automated Financial Systems, Inc.
James Costa, Chief Risk Officer, TCF Financial Corporation
Anil Hinduja, Executive Vice President and Chief Enterprise Risk Officer, Freddie Mac
David Suetens, Executive Vice President and International Chief Risk Officer, State Street Corporation
Stuart Lewis, Chief Risk Officer and Member of Management Board, Deustche Bank
On the Chief Risk Officer panel, John Shain of Automated Financial Systems opened the discussion noting that in the wake of Wells Fargo testimony, Thomas Curry of the OCC has stated that there will be a program for regulated banks on culture and sales strategy. In the news today, the Fed sent out a directive with a similar message. So, when bad things happen, there can be a piling on in the regulatory world these days. In this context, the panelists shared their observations, focusing on models, costs and international issues related to compliance.
Any introduction of taking a standardized approach to credit modeling will have a huge impact on calculation, noted Stuart Lewis of Deutsche Bank. And this lies in contradiction to what the Basel Committee has said about not adding more costs to banking system at the present time.
THERE IS A CHANGING ROLE OF CROS; THEY ARE COST MANAGERS. IN THIS SITUATION, FORESIGHT ON HOW REGULATIONS MAY CHANGE, EITHER ON THE GROUND OR FROM THE BASEL COMMITTEE, WOULD BE BENEFICIAL.
Deustche Bank has a large presence in the US and under the new regulations it must have models that meet US compliance standards. This involves adopting a US credit modeling approach, so it becomes a challenge internally not to have two streams of models and two sets of model validation activities. Naturally this adds to the costs of compliance. Further, we can foresee additional regulatory changes coming down pipeline, partly due to a range of initiatives for FRTB.
Thus there is a changing role of CROs; they are – far more than they used to be – cost managers. In this situation, foresight on how regulations may change, either on the ground or from the Basel Committee, would be beneficial.
Coming from State Street, David Suetens offered a slightly different view, observing that as an institution, his firm is privileged to live in same regulatory environment as its clients, who are asset managers and asset owners themselves. However, in the global environment, they face similar obstacles: just as there are challenges for European banks operating in the US – there are also challenges for American institutions operating in Europe. In principle, foreign branches are treated more and more as subsidiaries.
Moving to a purely domestic context, Anil Hinduja explained that Freddie Mac only operates in the US, with a focus on single family home mortgages and commercial real estate. As such it is not governed by the SEC or the Fed, but rather by the FHFA. Nevertheless, it is a ranked as a systemic institution and has been in conservatorship since 2008. Since then, a great deal of effort has gone into improving portfolio composition while continuing to provide liquidity and stability for the American housing finance system. It is worth noting that under receivership the profits made by Freddie Mac and Fannie Mae have gone to the US Treasury, offsetting some of the costs of the Global Financial Crisis.
Speaking for a large regional firm, James Costa of TCF Financial Corporation highlighted the journey of this mid-sized bank. Before the crisis, it was a typical regional player, offering credit cards, holding deposits, and financing home mortgages. It now has seven lines of business and operates in all 50 US states and Canada. It was necessary to reinvent the business in order to remain profitable. In terms of risk, there are certainly new challenges, but the old ones are still there as well. Financial firms need to have a keen sense of where they are economically and must manage their positions with regard to the credit cycle.
IF THERE IS ENOUGH RESILIENCE IN YOUR FIRM, THE QUESTION WILL BE, “HOW QUICKLY CAN YOU START YOUR ENGINES AGAIN?”
Before the crisis, firms were also handling regulatory issues including Basel 2 and Sarbanes Oxley. However, there is of course a much greater focus on compliance now, particularly with regard to the interaction between compliance and overall business strategy. In addition, financial firms have to deal with social engineering, cybersecurity risk and disintermediation.
According the James, in spite of these changes, at the core, the CRO is still charged with balancing the risk-reward equation and developing ways to adjust the firm’s posture, perhaps becoming more offensive and less defensive as knowledge is gained over time. This requires an understanding not only of the risk viewpoint on a bank’s internal culture and governance, but also awareness of the dependence on significant ongoing operational activities, which are a larger part of fabric of the cost equation.
Essential in this picture is an appreciation of non-financial risks and how to understand, monitor, manage and mitigate those risks. The non-financial risk space used to be focused on fraud and unusual losses, but much more has been added in the post-crisis environment. In developing a business continuity program, it is critical to provide a realistic view across all risks.
Given a serious adverse event, if you wind up in resolution you will no longer be in control. But if there is enough resilience in your firm, the question will be, “How quickly can you start your engines again?”