Ignore Risk Management at your peril, your entire bank might be at risk

Here we go again, now Carnegie, the Swedish investment bank, is being pummelled by the markets and country, for having completely mucked up its risk management, allowed traders to run amok and ended up with huge losses. 200 years of pristine reputation, clean and transparent firm, all firmly driven into the toilet.

How many times have we seen this? Risk management underinvestment and then traders take wrong posititions or mis vale or mark to model or something like that and then it blows up, usually bringing down the very management who did not pay money or attention to their risk management systems.

After thinking about it for 2 seconds, I came up with some questions arise which I would ask to the CEO

1. Who does the chief risk officer report to? If the CEO with NO dotted lines, then fine. If there are any dotted lines or matrix management, then there is a disaster waiting to happen. This is applicable to market, credit, ops, liquidity risk

2. Are each division's capital allocated based upon risk?

3. Do you match the divisional RoE with their P &L? On a monthly basis?

4. How do you base your bonus pool allocations? On revenue or adjusted risk levels?

5. Who develops your risk scenario's? How often do you do war gaming? Do your head of trading attend? What is your definition of comfort values?

6. Why are you not making your divisional risk and RoE transparent?

7. What is your investment in IT? What is the ratio of risk investments to trading investments? If less than 20 percent, why?

8. When was the last time you had an independent risk and trading systems audit? And seen the results? And acted upon them? And reviewed them? And fired somebody for not following them?

9. Where does product control fit it? Do they report to trading or risk heads?

10. Who is looking after your model risk? Do you know the stress scenario results? Under what circumstances do they fail? Negative interest rates? Liquidity risk? Spreads very wide? Exchange stops trading? A dr death scenario?

But I am afraid this will happen again and again and again, people just do not listen and short term profits will again overwhelm the risk manager's warnings. And then the bank will again drop into the muck!

All this to be taken with a grain of piquant salt!!!