Banks should benchmark their risk management frameworks, says Prof Moorad Choudhry
Bank risk management specialist Moorad Choudhry suggests banks should be more intentional about knowledge sharing.
The Covid-19 pandemic, and the lockdowns it triggered, took the world by storm and the banking industry was not spared. Professor Moorad Choudhry points out that no bank had lockdowns included in their risk plans, but they are now even more focused on risk management than ever before, dedicating more time and resources to building more resilient frameworks. He suggests that they also need to begin to benchmark these frameworks.
Moorad says that credit, market and operational risk are the most significant drivers of bank regulatory capital requirement, and banks recognise the need to manage these risks as efficiently as possible. Senior managers within banks need to have a grip on all three, not to mention liquidity risk as well.
Moorad has been teaching part-time for 23 years, during which time he’s worked in senior positions at various banks around the world. His practical and wide-ranging experience has given him insight into how different banks operate, and of the interplay between the key banking risk types. He is an independent non-executive director at Recognise Bank in London and at the Loughborough Building Society, and the author The Principles of Banking. Previously, he was treasurer of the Corporate Banking Division at The Royal Bank of Scotland, and he holds an MBA from Henley Business School and a PhD from Birkbeck, University of London. He currently teaches various banking risk courses at the Amsterdam Institute of Finance.
He believes that a thorough understanding of bank risk becomes more important the higher one moves up the bank’s management structure. “Specialism is important in a specialist role level, and at the junior and middle management level within a bank. But beyond that, when you get to CFO, CRO or CEO level, you need to have a good knowledge of all the main bank risks because of the interplay between them,” he says.
Understanding bank risk is important for board risk committee members, regulatory and compliance executives, risk management executives, internal auditors and market, credit, and operational risk specialists.
Lessons to take from Covid-19
“All banks and all economies, and all industries around the world have had to work through a completely unforeseen stress event in the last 12 months,” Moorad says. “Globally, it’s affected markets and it’s impacted different economic players in different ways, and yet it was completely unforeseen – completely unexpected. It wouldn't have been in any bank scenario – a pandemic that resulted in lockdown and enforced home working. No-one had stress tested for this, no-one had scenario played this. The lessons we’ve all had to try to learn from this are to be ready to respond quickly to unforeseen events, and to make sure we have a governance framework and a risk management decision making framework in place that enables us to respond quickly and make decisions quickly.”
His advice to banks is to chart a path forward, examining how risk tools like stress testing, scenario analysis and capital allocation will change in the post-pandemic world, and how to implement good practice accordingly. Key banking risks need to be adequately managed in banks’ ICAAP (Internal Capital Adequacy Assessment Process), which confirms that the level of capital in the bank is sufficient to withstand stresses.
Benchmarking is something Moorad views as vital in a post-pandemic world. This is one of the reasons he encourages the banking industry to be more intentional about knowledge sharing. “That’s why I teach,” he says. “I’m a big believer in knowledge transfer and I think it’s something the industry needs to embrace. We would all do well to share how we do some of these things, which would assist us in benchmarking and thereby confirming good practice.”
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.