Bridging The Risk Policy Gap
Posted: 8 September 2011
Business lines often tell risk managers that their risk policies are too conservative and do not allow them to do business.
In this paper, Michael Bryant, Managing Director of InteDelta explores how risk managers should respond and bridge the risk policy gap. The discussion is applicable to a range of business scenarios such as margin requirements for derivatives, advance ratios for private banking and credit pricing.
“Our terms are what? The market’s half that amount. You’re killing my business!” These are common comments directed at risk managers by a front office trying to get deals done and extend across many business areas from the margin required on trades with hedge funds to the advance ratios required for margin lending in private banking to the spreads required to compensate for credit risk in selling derivatives to corporates. The risk manager has a credit policy and a range of models which determine the credit terms. The business tells him the credit terms are out of line with the market and are constraining business. What should the risk manager do? “Bend “ the policy to accommodate deals or dig in his heels and accept that deals will be lost?