Financial Markets

A Lesson From SVB: Don’t Forget Risk Management Fundamentals

Recent bank collapses have increased the demand for competent risk management. What have we learned about the value of risk awareness, and what knowledge and skills do financial risk managers need to get ahead in this environment?

Friday, March 31, 2023

By Tod Ginnis

It’s now crystal clear that leadership at financial institutions can’t ignore risk and governance issues. That notion was reinforced by the risk management failures that led to the collapse of Silicon Valley Bank (SVB). But is there a lesson in this story for early-career risk managers?

Keep Sight of the Basics

Bill May, GARP’s Global Head of Certifications and Educational Programs, says it’s critical that aspiring and junior risk managers learn and maintain the fundamentals of financial risk management. It’s fine to choose a specialty, as most practitioners do, and spend most of your time honing your expertise there. But as you progress along your own path, you must keep your eyes open for anything that violates basic risk management principles – both for the sake of your employer and your own career.

Risk management fundamentals, says May, can not only help your firm assess its own risks and opportunities but also enable it to more wisely consider the pros and cons of entering into a variety of external relationships. “SVB had depositors, borrowers, shareholders, and bondholders. Someone had to make the decision to enter each of these relationships. There were also bank examiners and credit rating analysts who monitored them,” May explains. What’s more, as a major bank, SVB’s problems opened up substantial counterparty risk for other firms.

a2r1W0000015Yc9QAE_bill-may-500x500-1Bill May

Understanding and implementing risk management basics, says May, can prevent your organization from initiating transactions with imprudent firms. “Having an awareness of risk management fundamentals helps you identify potential problems earlier and puts you in a position to ask better questions, so that you can discover underlying issues,” he emphasizes.

This approach is much more valuable to a firm than waiting for problems to appear. There are no guarantees, of course, that landmines will be avoided, but May says that if your firm applies best practices or accepted methodologies in an “honest and prudent fashion,” it will stand a better chance of survival in volatile times.

Opportunities for Financial Risk Managers

The SVB case will force organizations to increase their awareness of the importance of having fundamentally sound risk management, from the entry level to the board. This should raise the demand for risk managers at all levels.

May supports GARP’s long-held belief that educating risk managers is about providing practical skills and knowledge that the financial services industry and its regulators demand. Every firm faces operational threats. But, as May says, this is just one of many different types of risk a financial institution must account for to keep its investments safe.

When you think about, for example, credit, market, technology, governance and climate risks (as well as all of their associated subcategories), it's clear that comprehensive risk awareness is vital. As May cautions, it’s the “risk that you’re unaware of” where big problems can occur.

The ability to identify, measure, and manage a multitude of risks is a key skill that organizations need from top to bottom. Risk managers with broad knowledge, training and skills are best-equipped to meet this need.

Tod Ginnis is a content specialist at GARP. He is the author of a GARP blog that is aimed at early-career risk managers and professionals aspiring to earn their Financial Risk Manager (FRM) certification.

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