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James Moore: Still too risky to take on bank bosses?

Thursday 16 July 2009 19:00 EDT
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Outlook The banking crisis was all about risk and the abject failure of banks to manage it. This was as true of executives like Sir Fred Goodwin – whose hubris caused them to blindly run into deals of paralysing stupidity – as it was of the traders and dealmakers paid fortunes for playing high stakes poker with other people's money.

Sir David Walker hopes to address this by changing the culture of bank boardrooms and improving the way in which they manage risk. Far too often the people charged with this function have been at best ignored, at worst fired for daring to question their employers' headlong rush into penury. Far too many of them did little more than to nod through whatever half-baked strategy those in more glamourous functions came up with while quietly picking up their not inconsiderable salaries and waiting for promotions to drop into their laps. As one of them said to me at the height of the crisis: "The fact is you know that if you want to get on, you have to get on with the people around you and you do not get on with people by kicking up a stink."

Sir David wants to change this. While he has stopped short of requiring that heads of risk sit on boards, he has demanded that banks shake up their risk committees and give them real teeth. Those committees will be dominated by "independent" directors, whose roles and status he wants to enhance (although we have been down this road before to little obvious effect). In addition, the head of risk will be appointed and paid by the entire board. The chief executive will not be able to remove him or her without board approval either.

On the face of it, these are the most important parts of Sir David's 39-recommendation strong reform package. He certainly identifies the risk committee and the newly enhanced role of chief risk officer as such.

However, while it sounds good in principle it is how it works in practice that is the key issue. It is going to take real will on the part of banks to change for this reform package to prove successful; and it is by no means clear that the will is there.

What is more, risk functions have traditionally enjoyed such low status in the culture of banks that it is hard to see even the best of those working in that culture stomping around in hobnailed boots at board meetings when the chief executive comes up with a whizzy M&A transaction, particularly if he's been taken out and told to cool it over a quiet glass of claret the night before.

Remember the lamentable performance of the people who led us into this mess called to account at the Treasury Select Committee. "No one could have predicted this," they whined. The worry is that the next lot to find themselves in a similar position will say: "Well our head of risk said go right ahead."

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