The middle office manifesto

Dear Mr RsikMan, every bank has a risk department yet there has been lots of losses in the past year, does this mean Mr RiskMan has also performed poorly by not stiring th banks in the right direction.....

Banks write downs have been over 100 billion and growing. if a risk manager could have saved a firm just 1 bn in write downs that sounds like quite a contribution to me. write down reducers, revenue bringers- what's the difference?

Depending on the culture within the firm risk management function can vary significantly. I know of firms where the role is to limited to limit monitoring and general compliance issues - these roles do not pay big bucks (for obvious reasons). At the other end of the spectrum in some firms, risk managers have an active role in risk managing where they approve trades and opine on the direction in which the business proposes to grow, products they intend to sell (and warehouse) keeping in mind the limitations of the existing (or proposed) infrastructure. These are the roles where salaries in excess of >500k will become increasingly common at the senior level as banks realise the extend of losses they can incur without a sound and more importantly, independent, risk function.

Risk management people are perhaps underpaid but what they really need is a bit of respect. Not for the fact that the floor may consider them 2nd class but simply for them to be effective. Money does not fix this. Desk level risk managers should report (but not be compensated) in a dual line to the head of the relevant trading desk and sit on the desk. Risk managers then frame the questions and the reports to the desk head as well as the Head of Risk Management (who needs to dual-report to Head of Capital Markets). When there is a disagreement the following things will occur to both the desk risk manager and the desk head: Does the desk head understand what the team is doing and the risk/pl and basis of valuation. If not how is this addressed? The same thinking goes to head of CM. Does he know and trust his desk heads and how they handle serious questions. Traders will always say "go away" to problems and annoyances since the world, for them, is framed in the very short term. The more senior people on the hook day to day will add a healthy trend to dig a little deeper (if only as ass covering). If there is a major problem everyone is going to burn.

Revenue_Bringer represents the classic incompetent trader mentality - the point of the risk manager is to prevent Mr Revenue Bringer from blowing up (and mismarking his book) which he is inclined to do given the asymetric risk /return profile of traders.