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Moody's: Initial lessons on managing risks at financial institutions one year into the crisis

Global Credit Research - 13 Oct 2009

Effective use of risk information in the decision-making process key to banks' success in withstanding the crisis

London, 13 October 2009 -- In a Special Comment published today, Moody's Investors Service examines the wide-ranging weaknesses that many banks have displayed in managing their risks and that the global financial crisis has exposed. As part of its rating assessments, Moody's is placing even greater emphasis on its dialogue with banks on how risk information influences the decision-making process at the highest levels of the organisation.

Following Moody's risk management methodology, the report reviews some of the main features of the financial crisis, identifies some initial lessons learned and highlights the implications for analysts and investors. "In most cases, the industry debate has focused on pure risk management failures, in particular those of risk models in measuring risks accurately. However, we believe that the broader issue of how risk is managed at the highest level of the organisation is central to understanding banks' weaknesses in managing their risks," says Alessandra Mongiardino, a London-based Vice President -- Senior Credit Officer and the author of the report.

The report notes that the market focus on quarterly results and the compensation structure of risk takers drove management at many banks to focus on short-term earnings, to the detriment of due consideration of the related risks. Boards of directors often lacked the technical expertise or the appropriate information to perform the necessary checks and balances effectively. The report also observes that the risk management function did not always have the necessary authority. "Risk managers faced significant challenges in having their voice heard, in particular in a period of booming revenues, low market volatility and perceived ample liquidity," says Mongiardino. Another issue identified in the analysis was the weakness of the stress-testing framework of many banks, and its limited impact on management decisions.

In this perspective, Moody's analysis also highlights how important it is for a bank to ensure its strategic and tactical decisions are taken on the basis of sound risk information. For this reason, the rating agency intends to expand its dialogue with banks on the coverage and communication of risk information to the senior management and the board and how this feeds into banks' decision-making.

However, the full risk profile of a bank and its ability to manage risks are inherently opaque, in particular for complex institutions. Any assessment of a bank's risk management practices therefore needs to take account of this opacity.

This analysis does not constitute a change to Moody's risk management methodology. Moody's does not expect to take rating actions based on this analysis.

The report "Managing Risk in Light of the Crisis: Some Initial Lessons Learned" can be found at www.moodys.com.

*****

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1020; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7 495 228 60 60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Classen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

London
Alessandra Mongiardino
VP-SCO- Risk Management Specialist
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Alain Laurin
Senior Vice President
Credit Policy Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Initial lessons on managing risks at financial institutions one year into the crisis
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© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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