The added value of risk management

The added value of risk management

The impressive Hermitage Amsterdam in itself offered visitors to the Zanders Risk Management Seminar 2015 a promising backdrop for an interesting afternoon. The speakers added value to this from their different perspectives.

On Thursday, April 9, the speakers provided an exciting afternoon at the Hermitage Amsterdam during the Zanders Risk Management Seminar. There, in the grand building on the river Amstel, the most recent developments, visions and findings in the world of risk management were shared.

Are financial institutions that attach greater importance to risk management able to create more added (shareholder) value? With this question during the opening of the seminar, Gerbert van Grootheest, partner at Zanders, immediately touched on what would be the common theme throughout the seminar. Academic research into the importance of risk management at the 100 largest US banks provided a convincing answer. Based on the development in market capitalization between 2004 and 2014, it emerges that the US banks that attached the greatest importance to risk management managed to survive the 2008 financial crisis in the best shape. Elements that express this importance include the power of the CRO within the bank and the quality of risk oversight.

In a concise, content-rich presentation on ‘risk management in a changing world’, Wilfred Nagel, CRO at the ING Group, confirmed that picture: at a bank, formulating the risk appetite is a crucial factor in the risk management cycle. “We started thinking differently about risk and measuring it differently,” says Nagel, after which he explained the risk appetite cycle. After the risks have been identified and evaluated, the risk appetite framework is set up on the basis of the ambitions that have been defined.

This framework consists of the risk appetite statements for the various risk areas, such as credit risk, liquidity and funding risk, country risk, etc. Nagel then talked about the ECB’s stress tests and regulatory risk. “Of course it is very important that these do not provide any perverse incentives,” whereby he cited the leverage ratio and floors for risk weighting as examples. Nagel’s talk resulted in plenty of interaction from the room, about various topics such as the banker’s oath, reverse stress tests, reputational risk and risk culture.

Next up was Monique Donders, CRO at the Robeco Group. “The set-up of a pension fund is not complicated,” Donders said, “but there are some complicating factors that impact the fund’s assets and liabilities. In this complex world, risk management provides structure and frameworks for making decisions.” She then explained the key aspects of the risk management framework from the perspective of a pension fund, with the focus of her presentation on the investment process.

Investment beliefs, deliberate choices in which the management board believes, provide starting points for the decisions throughout the entire investment process. The management board determines the fund’s ambition and risk appetite, in which context Donders talked about the role of asset-liability management (ALM), the determination of the strategic asset allocation (SAA), and the portfolio composition based on this.

In selecting the managers per asset class, it is then important to take into account the different styles and interconnections: “Do you opt for the portfolio of best managers or the best portfolio of managers?” The last steps in the investment process involve implementing the investment policy, measuring and monitoring the performance and risks and undertaking an evaluation: are the risks still in line with the ambition and risk appetite formulated? Donders concluded her talk with the observation that “clear agreements, good models and common sense are conditions for effective risk management.”

After a brief break, Jos Heuvelman, division director for Banking Supervision at DNB, outlined the most recent developments in risk management from the regulator’s perspective. DNB’s supervision may have changed, but it is clear that the CRO at a financial institution must be exclusively responsible for the risk management function. “We must set limits on the day-to-day practice for both financial and non-financial risks. The latter type of risk has manifested more frequently in the past years, but is usually more difficult to get a grip on and tougher to measure; it has become a specialist field,” Heuvelman said.

The findings of DNB’s research confirm the stronger focus on risk management at financial organizations. A key point for attention in this context is that new activities are watched closely, Heuvelman said. “And of course data quality plays a major role in the risk management framework; the AQR was a wake-up call.” DNB’s risk-based supervision has changed over the past few years, Heuvelman said: “We have lost certain responsibilities, but have been given others in their place.” A speaker from De Speld, the satirical online magazine, concluded the presentations with a brief but razor-sharp, humorous analysis of the afternoon.

De Speld’s Joep Stassen summarized the afternoon concisely with provocative questions for Gerbert van Grootheest. The speakers and the audience were also presented with a number of assertions and, for the final insights, Stassen brought in newsreader and correspondent Diederik Smit, who certainly had the room laughing.

The visitors to the Zanders Risk Management Seminar were also very pleased with the De Speld Reisgids Binnenhof (De Speld’s Travel Guide to the Binnenhof) which they could take home with them.

The well-attended drinks reception after the seminar confirmed that the afternoon had been full of added value.