David Stephen took on the role of chief risk officer at ANZ Bank just as the US subprime meltdown was getting underway. He gives his take on some of the challenges he is facing
How would you describe your role at ANZ – what are your primary responsibilities?
As chief risk officer (CRO), I oversee ANZ’s global risk management function. This includes credit, market and operational risks, our compliance function and the portfolio management units. At a group level this includes managing the process for the setting of risk appetite, oversight of the balance sheet from a risk, capital and provisioning perspective and reputational risk.
How does your role fit into the overall structure of the company?
I sit on ANZ’s management board and as such am directly involved in determining the overall strategy of the business. To facilitate this, risk management is aligned to the group structure with a specialist risk function in each of the core business units (personal, institutional, Asia-Pacific, New Zealand and operations technology and shared services) together with a central risk team that manages group-wide risk issues (group compliance, operational risk, provisions, portfolio reporting and management etc). I report to the chief executive officer, Mike Smith, and work with the heads of each of the businesses to ensure risk management is embedded within each of our businesses.
What elements of your role do you find the most challenging?
The first thing that comes to mind is the current business environment. We are in the midst of a global re-balancing of the risk:reward relationship. As investors in various asset classes re-price risks and re-balance their portfolios, price volatility and liquidity have become increasingly unstable.
What are some of the major issues you have had to deal with recently as CRO, and in your previous role?
There are many issues that we continue to face. The ongoing contagion in financial markets as led by the fallout from the subprime crisis in the United States is the major one. On the domestic economic front, we are dealing with a difficult inflationary environment. Regulatory issues, both locally and internationally, are something we need to remain focused on, as are capital requirements as outlined by Basel II. Our strategy to grow our presence in Asia is something that occupies a lot of my time. And of course there is always factor “X” – we have to be nimble and aware of emerging risks.
As part of ANZ’s expansion into China, it has struck agreements that include the transfer of risk management expertise. What does some of that assistance involve, and how will that benefit your partner and your operations there?
We have been supporting our equity partnerships in China for several years and have found this to be mutually beneficial.
ANZ is represented, and in one case chairs board risk committees in both Shanghai Rural Commercial Bank and Bank of Tianjin. This enables us to support the governance agenda of the banks.
We also have permanent mandarin-speaking senior risk management advisors located in both banks. In addition to their risk expertise, the advisors have previously operated in the China market and so are able to provide customised solutions and advice. They support targeted programs across a range of areas including:
• credit process reengineering;
• portfolio controls and rating tool development;
• governance – instituting and supporting;
• board level, risk committees;
• operational risk, frameworks, skills transfer, implementation support; and
• market risk – governance, VAR, reporting and controls.
What are some of the major changes in recent years that have had an impact on your role?
The risk function is always shifting, both in the structure of the role and in our approach to assessing risk. This means that I need to be fairly flexible as I need to be able to work within an increasingly complex and rapidly evolving industry and a volatile economic climate.
How is the role of chief risk officer in the banking sector evolving?
The role of the CRO has changed considerably over recent years and it will inevitably continue to do so. It wasn’t that long ago that CROs were primarily involved in risk measurement and reporting, with little actual direct involvement in the setting and execution of business goals. This, I’m pleased to say has changed considerably. While the CRO is still responsible for risk measurement frameworks and methodology, the role of the CRO at ANZ has been one that has sought to embed risk management into the culture of the bank.
CROs are now seeking to develop holistic, or enterprise-wide, approaches to risk that consider risk in an integrated manner at all levels of the bank to drive to optimum capital management and performance. Recent market dynamics and the contagion effect have highlighted the need for this.
What is the usual career path to your position, and has it/is it changing?
Typically, the background of a CRO reflects the main types of risk taken by the banks in question. For example, global investment banks with a large prop trading operation will have a need for different skills than in a commercial bank. There are however certain core traits: an inquisitive mind, an ability to see through to the heart of an issue and an ability to make accurate and timely decisions, sometimes with limited facts.
What advice would you have for someone interested in working in your field?
In a world of increasing globalisation and faster financial flows, two things are key: One is a global perspective and the other is an understanding of how various markets and asset classes can impact each other.
What are some of the major challenges ahead for risk officers, in general and in the banking sector? What do you see as some of the trends that will affect your role in future?
After a sustained period of relatively benign credit conditions, we are entering a period of weakening economic performance in some key markets and high levels of market volatility. This will lead to more earnings volatility, credit quality pressures and new challenges for businesses to meet.
Against this environment the key challenges for all CROs will be to ensure underwriting and risk policies remain appropriate, with selective tightening. Stress testing and sensitivity analysis across the portfolio will assist in assessing portfolio vulnerabilities and will be important inputs to assist in identifying and implementing mitigating strategies.
Risk officers need to continue to work closely with customer/product managers as they seek to understand the impact of the changing risk environment on their customers and assist in identifying new business opportunities that can and will arise.
How much is corporate sustainability an issue you have to consider in your role? If so, in what ways? If not, is it likely to be something you will have to take into account more in future?
ANZ has had a consistently strong focus on key areas of corporate responsibility. We pay close attention to our culture, our customer’s concerns, the needs of our staff and the communities in which we operate. We need to take into consideration all potential externalities, whether these be related to climate, economy, environment or politics. Our work will be guided by these considerations including community sentiment, the decisions and policies of governments and regulators, and the views of key social and environmental interest groups.
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