Risk managers move into spotlight

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The cause of their higher profile is the increasing awareness among firms that protection against risk of various kinds is essential to their success. The competition for risk management specialists has been ballooning. Many in the top tier earn salaries approaching those of their investment banking cousins.

Regulatory changes in the pipeline of the Basel Committee on Banking Supervision have solidified the need for dedicated risk professionals.

While most of the larger institutions hired extensive credit risk departments some time ago, the changes to the committee's Capital Accord will undoubtedly push up demand.

The Accord dictates the amount of capital an institution must set aside to protect against a loan or derivatives deal going sour.

Ben Hertzberg, managing consultant at TMP Worldwide, the headhunter, says: 'With the implications of the Basel Accord, and credit risk becoming increasingly active, the demand for risk managers is phenomenal.'

One of the main reasons is that under the proposed revisions, institutions will be able to determine the amount of risk involved in doing business with a corporate client, and how much capital will be needed to offset that risk. This will shift the emphasis towards more complex methodology and modelling. This has opened the door for individuals with little banking experience, and not only in credit risk.

Tony Tucker, managing director of the Executive Resourcing Group, the headhunter, says that market risk is an area where banking experience is of limited importance.

'The requirement is a highly mathematical, numerate background - hence a demand for maths or physics PhDs,' he says.

Many risk candidates are coming from the traditional Big Five accounting firms and specialist consultancies. Candidates are lured by the promise of interaction with the trading floor and excellent career prospects.

Hertzberg says: 'The attraction for candidates is the exposure to finance, trading and the increased chance of promotion to senior board level and general management.

Risk managers that are most in demand are those who can work with the business side by side in a consensus environment.

'These people are a source of independent opinion for the heads of trading businesses to turn to.'

Another attraction is the rise in salaries, which have moved upwards as institutions realise they can lose as much from poor risk management as they can from mistakes by their top rainmakers.

For someone straight out of a top university, 40,000 (€64,000) is not uncommon in the UK, with some institutions willing to pay more than 70,000 for a top PhD candidate with a market-related thesis.

The pay scale jumps to six figures for someone with a few years experience, with front-office level bonuses now common.

As markets become more uncertain, banks are placing a higher value on market analysis that can predict trends and cycles.

While the credit and market risks sectors have enjoyed the most growth over the past few years, the great unknown is what staffing solutions institutions will come up with when proposed changes in operational risk take place.

Operational risk is essentially the danger that a rogue trader or some unforeseen event could bring an institution to the brink of collapse.

The Basel Committee has addressed the regulation of operational risk and is still investigating ways for banks to incorporate it into their overall framework.

Andrew Cross, who heads credit risk management at Credit Suisse First Boston, says: 'Operational risk is a new discipline for a lot of banks which explains a lot of the activity on this front. The skills required on the operational side are a definite mix of qualitative and quantitative.'

The lack of measurement tools for operational risk, unlike say credit risk, has made it difficult for banks to recruit in this sector. Nevertheless institutions say they are pressing ahead with their own initiatives to convince regulators that they are developing new approaches to the whole risk universe. The attacks on New York on September 11 have heightened awareness of the issue.

This is all taking place against a backdrop of enormous change for financial institutions in Europe.

In the past two years banks have faced the threat from the millennium bug and the introduction of the euro which, when coupled with all the merger and acquisition activity, has made it difficult for operational risk managers to hold the attention of business leaders in their institutions.

Since it is sometimes difficult for an outsider to grasp the operational matrix of an entire institution, some banks have started to combine certain functions to create a more cohesive, centralised operation.

Michelle Henry, senior consultant with Sheffield Haworth, the search firm, says: 'A few years ago the trend was to have multiple risk functions covering credit risk, market risk, operating risk and operations risk all working relatively independently of one another.

But increasingly our clients are looking for a seamless end-to-end risk assessment and management process with greater co-operation across all lines.

'This has meant that risk managers generally now need a greater understanding of all risks and not just their area of speciality'.

The need for a seamless risk structure that oversees the actions of an entire organisation is illustrated by events ranging from the problems faced after September 11, caused by terrorism, to the failure of Barings in 1995, caused by a rogue trader.

A survey by Robert Walters, the recruitment firm, shows that both credit and market risk analysts in the UK with three to five years experience are earning salaries of 55,000 to 70,000.

Alex McCann of Robert Walters says that salaries have remained stable in the past six months because of the economic downturn, but that the outlook is brighter.

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