A Risk Professional's Survival Guide: Applied Best Practices in Risk Management

CHAPTER 1 Navigating Risk at SifiBank

OVERVIEW

Managing risk at a banking institution is one of the most critical activities carried out by financial firms. Banks could not expect to have much longevity if risk management were ignored or poorly executed. The subprime mortgage crisis of 2008 offers a once-in-a-lifetime case study of how many different types of financial institutions lost sight of the importance of risk management and either went out of business, were forced to merge with healthier firms or had to take a bailout from U.S. taxpayers. And this was not a U.S. phenomenon limited to only the U.S. banking industry: The global financial sector during the 2008–2009 period was in virtual free fall with many experts fearing an economic depression on an unprecedented scale. While many causes have been attributed to the crisis—a number of gaps in regulation, a financial incentive structure that rewarded short-run profitability and production, the interconnectedness of banks and other financial entities comprising the so-called shadow banking sector—nevertheless, at the heart of the crisis was a fundamental lapse in risk management across a great swath of the industry. Particularly problematic was that the largest financial institutions were among the companies where risk management deficiencies were most acute. Given the scale and scope of these global financial behemoths, these gaps in risk management at the institution level would manifest as systemic risk and contribute ...