Banks need a more flexible risk management framework, says Prof Moorad Choudhry

Covid-19 has highlighted the need for adaptable asset-liability management, Prof Moorad Choudhry says.

Professor Moorad Choudhry says that in the wake of the Covid-19 pandemic, he’s suggesting banks begin to consider a “flight simulator” approach to risk management and stress testing. People studying for their pilot’s licence experience this type of training, in which the examiner will simulate an emergency, based on a range of possible scenarios and parameters.

“You don't know what's going to happen; it's suddenly there in front of you and you've got to deal with it straight away,” he says. “I think banks need to have a more flexible and adaptable risk management and stress testing framework like this so that they can be assured that their framework is indeed fit for purpose in dealing with short-notice unexpected stress events.”

Moorad is an independent non-executive director at Recognise Bank in London and at the Loughborough Building Society, and the author of The Principles of Banking. Previously, he was treasurer at the Corporate Banking Division at The Royal Bank of Scotland, head of treasury at Europe Arab Bank, global head of treasury at KBC Financial Products, vice president in structured finance services at JPMorgan Chase and a gilt-edged market maker at ABN Amro Hoare Govett. Moorad holds an MBA from Henley Business School and a PhD from Birkbeck, University of London. He also teaches on various banking risk subjects at the Amsterdam Institute of Finance.

One of the topics close to his heart is asset-liability management (ALM), and he emphasises that all banks are not alike. “Banks are different creatures doing different things with different types of customers, products, business models, and operating structures. You need to be able to apply ALM principles and adapt them to your own surroundings,” he says. “There isn't a one-size-fits-all. There's usually more than one right answer. The same solution will not be ideal for every bank. I'm 100 percent against this idea that everything is top secret in a bank. It amuses me somewhat when you see all this ‘proprietary to us’ thinking. There are other banks on the same road as you, selling the same products as you.”

He believes that sharing different approaches is important for benchmarking and developing best practice. “You tell me how you do ALM, and I may change my view, or you might change your view based on me telling you how I do it. I think the industry should embrace knowledge sharing. The more people know about how other people do things, the better it'll inform our judgment.”

Moorad believes this kind of knowledge sharing is particularly important in the era of Basel III, with banks needing to work towards balance sheet optimisation in order to satisfy the demands of multiple stakeholders, from regulators to customers and shareholders. “Efficient and effective ALM practice is the primary part of this process,” he says.

Professor Moorad Choudhry teaches a successful 3-day online programme in Bank Asset Liability Management at the Amsterdam Institute of Finance (AIF).

Read more about this on the Amsterdam Institute of Finance's website.