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Aleem Gillani, Chief Market Risk Officer, PNC Bank
Aleem Gillani, Chief Market Risk Officer, PNC Bank
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Risk Management: Science, Art ... or Both?

As PNC Bank (more than $70 billion in assets) transitions from a "super-regional bank" to a national franchise, it faces the challenge of adding shareholder value while maintaining prudent risk management standards, says Aleem Gillani, the bank's newly appointed chief market risk officer.

As PNC Bank (more than $70 billion in assets) transitions from a "super-regional bank" to a national franchise, it faces the challenge of adding shareholder value while maintaining prudent risk management standards, says Aleem Gillani, the bank's newly appointed chief market risk officer. Gillani, who is using his prior experience as an accountant and trader to help the Pittsburgh-based bank manage its risk during the transition, spoke with BS&T Associate Editor Cynthia Ramsaran about risk management and the role that technology plays in the financial services risk arena.

BS&T: What is the focus of your job as PNC's chief market risk officer, and how has your specific experience prepared you for it?

Gillani: I am here primarily to help the company decide its risk appetite: How much risk are we willing to take? Market risk is a component of our overall risk, and there are different types of market risks. How much risk do we want to take in terms of proprietary trading? (There is very little in that area now.) How much market risk do we want to take, for example, in foreign exchange risk versus equity risk? I am here to help the company decide what types of risks we should take and how we should allocate that risk along the various lines of business.

My background is a little bit unique; it is in trading and accounting. I originally trained as an accountant - not too many people are around who can talk to the auditors and the traders at the same time. That has helped me a lot because so much of what we do involves the fact that we are very aware of shareholder value and economic value. We are always looking for ways to optimize that amount relative to the risk we take. But so much of what we do is also accounting-related. We always have to be aware of the accounting rules. As it turns out, the background that I ended up having - probably by accident - is very helpful in this job.

BS&T: What is the biggest risk challenge that PNC currently is facing?

Gillani: As we transition from a credit-focused super-regional bank to somewhat of a national bank, our challenges are: How do we build a national franchise, and how do we grow and add shareholder value - and at the same time maintain very prudent risk management standards? How do you maintain the good risk management culture that has existed in many parts of the company and at the same time look to grow to become a national franchise?

BS&T: What is technology's role in risk management?

Gillani: In my area, technology is almost to blame for creating a lot of the risk that we face today. The growth of sophistication in today's capital markets products has just been mind-boggling within the last three decades, and much of that is a result of the technology that has evolved to help build and manage those products. The growth in computing power over the last three decades has been able to help build far more complex products, and managing the risks of those products has entailed the creation of new products. That is one of the biggest challenges that anybody in risk management has faced, particularly over the last 12 years or so.

BS&T: What is the best approach to managing risk?

Gillani: For me, it's less technological. It is really about the people - having the right people within the company who understand the strategic direction of the company, who understand our customers and what it is that they want and how to provide them with the risk management tools that they need to manage their exposures. Understanding the product and the market and having the right mix of people who understand all of those aspects is the way to manage risk. I look at technology as a tool to help you measure and quantitatively monitor that risk.

BS&T: What kinds of tools and systems are available to help manage market risk better?

Gillani: At the back end, the systems that allow financial companies to measure and monitor their residual risk have been following the growth in products [that were] driven by technology aimed at the frontline - those people who are most directly interacting with customers. The new front-end systems were the drivers for product management through the '90s. The back-end systems really didn't start [addressing customers] until the '90s, and they are continuing today.

Front-end systems are primarily product-oriented, and today those types of systems allow our front-office people and their managers to have real-time, or near real-time, risk information. But [because] those systems are really product-oriented, financial companies are left with silos that are product-based and systems that perpetuate those silos. Multinational banks today really don't have a product suite that allows them to have real-time aggregated risk exposure across all their products and locations, and that's one of the big focuses for companies in this space - probably for the next decade.

BS&T: What about PNC specifically?

Gillani: We don't have international locations, and all of our trading rooms are within two time zones: eastern and central. So for us it's a lot easier, since we don't have to worry about time-zone differences, and we have people in all of our locations who are very much aligned with the strategy of the company. They know what our customers want. They are very customer-focused. We also do a lot of proprietary trading. That kind of product mix and customer mix makes it easy for us to measure and monitor our residual risk left over from customer transactions on a near real-time basis.

BS&T: How is market risk management evolving?

Gillani: The biggest change has been an attitude change. Market risk management, 10 years ago, was very oversight-oriented. Over the last decade or so, people in the practice have evolved to become "police officers" and consultants - people who can help build business and help structure transactions and provide the governance and oversight that the business needs. For example, I get asked by the lines of business to help our clients figure out what kind of risk management they need. Fifteen years ago that would not have happened. I also will get asked by credit folks to look at clients and help evaluate the types of risk they have so we can decide from a credit perspective if we want to loan more or increase the size of our line to customers.

So, market risk management is turning into a group of internal and external consultants and police officers. One of the reasons for that is because market risk really grew up initially as an analytic function. A lot of those analytic disciplines that started out in market risk are now being used in credit risk and are now starting to be used in operational risk. As operational risk turns from an art into a science, the kind of analytic discipline that has started in market risk is migrating to operational risk.

BS&T: How will these trends continue to evolve?

Gillani: The trend is accelerating. Today, companies are much better internally aligned. Everyone understands that the key is shareholder value. At the end of the day, we are all here to optimize that value. So alignment really is important to try and figure out what is best for our customers and what is the best thing to do to manage whatever residual risk we have left over.

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