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Reflections on Risk

Leading banks are pursuing new ways to achieve competitive advantage through superior risk management.

All Risk Is Local

In addition to its enterprise risk efforts, The Bank of New York has taken steps to ensure that each business unit within the firm has a risk-aware mindset. The bank looks at each line of business as an individual unit in terms of risk, forming infrastructure teams within each. Thus, each business has a "CEO" with a cross-functional risk management team, involving staff from risk, technology, compliance, legal, finance and support functions. "They're meant to be problem-solvers," BoNY's Gibbons says.

Drawing upon domain-specific knowledge, the risk team can stay alert to situations in which "we're embarking on something above our risk threshold or if it's a new risk that we've never undertaken," Gibbons explains. For example, if the manager of a trading operation wants to offer a new product, the trading risk group would determine the impact of the product from several perspectives. "What are the risks? The compliance issues? Is it suitable for the customers? What's the market risk that it's going to consume? How are we going to hedge it?" Gibbons says.

Looking ahead, the data needs are expected to skyrocket as the bank discovers new ways to achieve competitive advantage through superior risk management. "Once you start reporting on something and analyzing something, you want to do it more and more, and so the demands on it just go up," Gibbons asserts.

But the long-term benefits are pretty significant, he notes. "Reducing the volatility of your earnings and optimizing your returns - those are long-term shareholder benefits," Gibbons says. "Even short term, it's knowing where to attack your portfolio where you're not getting the adequate return on your equity," he adds. "It's not easily measured, but there's definitely return on investment."

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