Chris Skinner says that CROs have failed in their role of managing risk. But he doesn't believe CROs are at fault -- "faulty models, ineffective risk systems and a complicated market are the culprits."
Skinner is a commentator at the Finanser, chair of the Financial Services Club, and CEO of Balatro Ltd. At a recent dinner for CROs, he summarized the industry's problems and solutions with R.I.S.K. This acronym that Skinner coined stands for Regulation, Innovation, Strategy, and Kafka.
R for Regulation
"There is too much Regulation around at the moment, and it is too complicated," begins Skinner.
He says that we live in a "two-stream" world where one half is in an economic meltdown and the other half is growing. These two streams have different regulatory needs, so -- contrary to the popular idea -- a single, standardized set of regulations will not be "one-size-fits-all."
We cannot even agree [on] basic regulatory harmonization, as illustrated by the dichotomy between the European Market Infrastructure Regulation, Dodd-Frank and MiFID II (see the CAS-WG for more). We see huge debates over definitions about everything, from what is and is not a speculative versus a commercial use of derivatives to how much collateral needs to be posted on which exchange venues and when.
All of these things are combining the power of data in the cloud to provide contextual and targeted marketing in a real-time world.
It's a catch 22: We cannot create a single framework that fits the two streams, but without it we may go back to the same problems as before the recent crisis -- people find and exploit the holes.
He says, "...the best strategy is to look for the core of what needs to change and manage as best we can."
I for Innovation
Innovation has made some remarkable new technologies available in a very short time, including the cloud, big-data analysis, and mobile and social platforms. Some of the more memorable applications of these innovations include:
- Using a dongle to process a sale from a mobile device.
- Analyzing Field Programmable Gateway Arrays for high-frequency trading in real-time.
- Using geolocation to produce proximity-based marketing.
"All of these things are combining the power of data in the cloud to provide contextual and targeted marketing in a real-time world," explains Skinner.
S for Strategy
"Things change fast and in real time, says Skinner. "Strategy represents the question of what to do next."
In financial services, Skinner says that the focus should be on innovating, taking on risk, and being daring. It's all about knowing the risks you face so that you can take steps to manage the risk.
"If you know the risks you are getting into, you can hedge and scenario plan and insure yourself against issues and exposures," he said.
He uses another acronym (P.E.S.T.) to describe the things that will impact your business in the future. You have to be cognizant of and understand "the political, economic, social and technological changes coming downstream."
- Political -- regulatory changes.
- Economical -- two-stream world of opportunity.
- Social -- an increasing influence of individuals.
- Technological -- the expanding use of mobile and other yet to be developed devices.
So, strategically I recommend that you are daredevils but with a clear foresight. Innovate and win, but avoid erroneous and obvious risks by clearly understanding your future shocks. Track your future shocks by understanding the uncertainties around the world politically, economically, socially and technologically, and try to make those unknowns known.
K for Kafka
The surreal -- sometimes bizarre -- writings of Franz Kafka, considered the most influential writer of the 20th century, prompted the use of "Kafkaesque." "Kafkaesque has various definitions, but the key one I would pick up and use would be being 'marked by a senseless, disorienting and often menacing complexity and impending danger,' " says Skinner as explanation for his final part of the R.I.S.K. acronym.
He says the financial markets could be seen as Kafkaesque; they are "off-kilter, disorienting and slightly menacing." The constant chaos has trained us to accept uncertainty and doubt as the norm. But uncertainty and doubt aren't a good recipe for effective risk management.
Skinner told the CROs that their role is restoring the balance:
In fact, it is critical that you do this, as financial markets cannot exist without taking risks, innovating and being daring. We have globalized innovation and risk, and so, it is no surprise that the innovations and risks are far greater today than they have ever been before.
His suggestion is that risk officers build a pool of knowledge and collaborate to manage risk -- globally.
"It is imperative for the industry to get better at tracking the multiple risks we face -- collaboratively, rather than individually," said Skinner. "That is where I see the greatest opportunity today for change."
Read Chris Skinner's entire speech, "Risk is a many splendored thing," at The Financial Services Club's blog The Finanser.
This originally appeared on the SAS Knowledge Exchange.