THE INSIDER: Risk and Regulation suddenly look interesting

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Two types of individuals that are about to have a major rise in importance in the markets as part of the epochal change we are currently experiencing are: risk managers and regulators.

Despite all of the rhetoric about paying attention to risk management, historically, producers (dealmakers, traders or sales people) ran banks. Producers focus on revenue first, costs second, and risk last. OK, I might change that order for traders, in particular, where risk comes second, but it is a very distant second.

Risk managers in almost all banks have been treated as second class citizens. In almost all banks they were criticized for failing to understand the bigger commercial picture - a picture, by the way, that the front office producer clearly saw with such blinding sight.

Humble pie, however, has been served all around the front office and risk managers are about to become a whole lot more powerful. While the investment banking world is not yet likely to be run by risk managers, the future will look more like a joint venture between producers and risk managers than ever before.

This means that risk managers will become much more highly paid (relatively speaking of course). It's therefore likely that we will see a similar pattern to the internet security industry, where hackers turn security consultants. In our world, producers - mainly traders - will increasingly become risk managers.

If risk managers were second-class citizens, then regulators were disenfranchised plebians. They didn't, however, suffer the same indignities as internal risk managers as they did wield some clout.

However, it's a misconception to think that regulators are well staffed and full of armies of smart people who understand all of the issues sufficiently well to regulate. I mean no offence to the regulators - they had an impossible task. It's unthinkable that grossly under-staffed regulators could stay abreast of all of the innovation and development across a multitude of complex market microstructures.

This may now change. Regulators are reliant on investment from the public sector, which is a much slower moving beast, but the FSA is already hiring new blood and paying more for it. All the shrieking about wasting "tax-payers' money" on shoring up the banks is creating the impetus to ensure this doesn't happen again.

In the future I suspect that working for the regulator and working in investment banks' risk management teams will become interchangeable careers. Getting into either one at the moment is certainly a good bet.

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