Rogues of Wall Street

CHAPTER 20 The New Tools of the Trade

For many financial firms, the tyranny of the regulators can be somewhat deadening to the creative juices of risk managers everywhere. As we have seen, although firms have been following Basel requirements for operational risk, there has hardly been a stemming of the tide of losses. If anything, there has been an acceleration in their occurrence.

As we have seen, the tools required under Basel are inadequate, on their own, for both tasks of measuring and managing the risk that financial institutions now carry. In the face of a seemingly unending supply of large losses, CEOs are turning to their risk colleagues with exasperation: Why did you not see this coming? How do I know what's next? In addition to changing the organization to empower all employees to be risk managers, new tools need to be put in their hands so that organizations can avoid rabbit holes and see around corners.

Putting People to Good Use and Avoiding Rabbit Holes

As any good doctor will tell you, prevention is better than a cure. While it is possible to improve the tools available to identify risks, and we will discuss these, would it not be preferable to stop the risk activity from occurring in the first place? Clawbacks and other methods to adjust bonus and pay based on negative surprises are just part of a sea change that is very much needed in the way employees are compensated on Wall Street.

To be successful in reducing operational risk requires behavior change. ...