Wednesday, February 17, 2010

Risk & the Financial Crisis


As promised, I have been dwelling over the idea to come up with a post on the financial crisis which has gripped us all - the effects still noticeable like the cracks in the castles which are always visible and incur huge monies in repairs.

I conducted this small poll to test how much people know about it - statistically insignificant dataset to infer any meaningful conclusions from the results. Distribution skewed to the left by which I mean 'somewhat' knowledgeable population. Just an idea for you - while conducting polls never give odd number of options for responses as in such cases most of the responses would tend to be the median value. Try to give even number of options to choose from as it then forces the responder to choose one direction, thereby resulting into a decisive mandate.

Well, I just drifted away a bit. Coming back, what has this financial crisis done to people – everybody knows. But what has it done to the bankers – nobody wants to know. In one of the informal discussions at work, I heard a colleague of mine complaining – “I have stopped telling people when asked what I do, that I am a banker. I just say I am a modeller”. Leave it to them to understand what that means, because if you make it easy for them to understand, you get the reaction.

I am not going to bore you with what caused the crisis (as most of us already know that - courtesy my polls). To be honest, I did not get any time to draft a detailed post to write down the whole story. Just Google for words like financial crisis / credit crunch / subprime crisis and you get loads of websites talking about them. So I am not going to bore you with any more of techy information. What it definitely has resulted in is an increased attention to risk management in banks.

Before the crisis dawned upon us, I was somebody who could have become an investment banker but landed up becoming a risk modeller. I was not sure that time if I wanted to remain in the same profile for long, but now I am so sure. Risk management in banks have picked up momentum. It is a field where you can show your flair - not much done in the field and hence you constantly research and improvise. Risk systems are getting more capital allocations and risk reports are now coffee table discussions. With Obama overhauling the regulatory systems in the US and the world following suit, the day is not far off when CEOs of banks would be people with extensive experience in risk.

I think it is very important to be risk conscious. That does not mean that I suggest going to an extent of becoming risk averse (no risk means no return), but do not become irresponsible that you forget what the stakes are. Exactly knowing your risk appetite is the way forward!