Banks see common sense, not rules, as key to safety

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Banks keen to look beyond capital ratios for safety are embracing an integrated approach to managing risk in the post-crisis world, with Deutsche Bank and BBVA among those reworking strategies.

After surveying 28 chief risk officers at the world's largest financial institutions, professional services firm Deloitte estimates that the cost of risk governance and controls for the top 100 financial institutions is set to exceed USD 100 billion euros by 2012, double the costs in 2006.

Analysts said that banks had realised that risk management systems were operating in silos, and the crisis had focused their minds on the need for a more holistic picture.

"The buzzword right now is integrated risk management. Market, credit and operational risk are now reporting to a single person," said Alastair Graham, managing director of the Global Association of Risk Professionals, which has 110,000 members.

Deutsche Bank's chief risk officer Hugo Baenziger said Germany's flagship lender is "reducing the number of models we use to calculate our risk from over 40 to four to get more transparency".

BBVA, a Spanish lender, has launched a general revamp of its risk area to streamline decision-making capacity.

"The aim of this area is to offer to the senior management a target risk map with investment and disinvestment recommendations, taking into account the impact in the global risk profile of the group," a spokesman said.

Spurred by talk that the crisis was caused by false bonus incentives and inadequate capital rules, the Basel Committee on Banking Supervision unveiled a raft of new proposals designed to make the financial system more robust.

But the demise of Lehman Brothers in September 2008 shows that altering bonus schemes to better align bankers' personal fortunes to the fate of their employers will not necessarily avert disaster. Neither will tougher capital rules.

Five days before it filed for insolvency, Lehman had a Tier 1 capital ratio of 11% -- almost three times the industry average -- and senior staff had 65% of their bonuses in stock options which were restricted for three years.

Lehman staff held around 30% of the banks' stock.

Despite this, Lehman executives lacked a big picture view of their predicament and failed to spot the lender's overreliance on short-term refinancing tools until it was too late.