Rogues of Wall Street

CHAPTER 25 Conclusion: Seven Traits for Successfully Managing Cognitive Risk

Banks have been wrestling with the issues and processes I have been discussing in this book for the past several decades. These days, it is never enough for banks and other financial services companies to merely take risks. Firms must calibrate their risks and monitor them as much as they project return on investment. Every prudent risk is taken with an eye toward avoiding the imprudent one.

It is now a given for any high‐functioning, risk‐taking institution to have an internal department—or departments—devoted full‐time to measuring and setting the firm's risk meter. I call this a company's risk organization. Supervised companywide by the chief risk officer, the risk organization comprises managers who report to the CRO, including those tasked with overseeing specific risk areas (operational risk, market risk, credit risk, etc.), as well as business‐line managers directly attuned to the risk sensitivity of each revenue center.

Banks that are prioritizing the risk organization are seeing ever‐increasing resources devoted to risk management. However, those resources alone do not achieve effective risk management. High‐functioning risk organizations I have observed and worked with share and exhibit certain common traits. Here is my list of the seven traits that increase the likelihood of success.

Mature Governance Structure

The first trait of a high‐functioning risk organization is a mature risk ...