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Analyzing the Shifting Profile of Chief Risk Officers at Top US Banks

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Analyzing the Shifting Profile of Chief Risk Officers at Top US Banks

By Daniel Solo

The banking industry is full of qualified C-Suite executives who have historically navigated banks through the most tepid industry temperatures, even extricating them from the deepest bowels of financial recession.

Pulling from pools of competent candidates, banks have diligently handpicked talent to fill these critical roles, usually from within its internal talent.

However, Wells Fargo recently departed from several years’ norm of internal sourcing by creating an external vacancy for the bank’s position of Chief Risk Officer (CRO), giving rise to the question: What qualifications and background must CROs have and what is the future of this critical role?

The integral role of risk

Today, more than ever, risk has a paramount role in banking. Banks are striving to promote a robust, independent risk function that is segregated from the enterprise’s revenue generation efforts while also overseeing its risk-related activities. This function requires a keen eye and the ability to adapt with evolving external regulatory pressures, landscape and industry practices.

CROs are the leaders who bring the vision of risk mitigation to life, serving as an important line of defense to safeguard both in immediate daily operations and future efforts.

Daniel Solo

Daniel Solo

The significance of a CRO

As critical stakeholders in the bank, CROs are hired to shoulder vast responsibility in more diverse ways than in previous years. These officers are strategic visionaries, managing both the bank’s risk management function and subsidiary-level risk personnel, while liaising with all lines of business across the enterprise.They also collaborate with the bank’s board to support, develop and implement risk boundaries, appetites and culture for the bank.

Essentially, CROs have and continue to serve as the critical component that empowers banks to keep their risk doors fluctuating smoothly, permitting specific types and levels of risk while firmly locking out others.

Banks continue to realize the gravity of this role, which is evidenced by the steady increase of CRO positions at global financial institutions, growing from 65 percent in 2002 to 89 percent of said institutions with CROs in 2013, according to Deloitte Touche Tohmatsu Limited.

Finding an individual who can seamlessly manage this mix of responsibilities may appear to prove a challenging feat, which begs the question: What are the professional dynamics, background, skill and knowledge of the individuals filling these large shoes today?

A deep dive into the attributes of current bank CROs in the U.S. unveil curious discoveries to that question.

The key factors of CROs

CROs seemingly have similar qualifications, but the background of those in the banking industry unearth interesting facts about their most common facets.

Tenure

Of the CROs hired and referenced in our research, 21 were in their current role for two years or less, and 15held their position for less than a year.

The variances in tenure between different calibers of banks are also noteworthy. For instance, 8 percent of CROs belonging to banks with assets totaling more than $250 billion had been in their role over five years, while those with less than $250 billion had 30 percent with that same tenure.

Coincidentally, in the past year, even the average tenure of CROs has dropped from an average of 4.10 years in 2017 to 3.54 years in 2018. That may be in part because CRO positions are commonly perceived as a rotational role for business executives, serving as a stepping stone into a more senior leadership position and opening other windows of opportunity.

Profile

Commonly, not all CROs possess a risk-based background, and the percentages of those who do are falling. For instance, in 2018, 76 percent of current bank CROs have been tracked to have backgrounds in risk, credit and business, which is a number already down from 88 percent in 2017. Conversely, CROs with a history in audit, treasury and regulatory appear to be on the rise, with 14 percent coming from those backgrounds in 2018, which is drastically up from only 6 percent in 2017.

However, the distinction is even greater in large banks versus smaller ones. Ninety-two percent of CROs in banks with over $250 billion in assets had experience in risk, credit and business, while only 71 percent of CROs of smaller banks could claim the same. In the reverse, smaller banks accounted for 91 percent of CROs who came from compliance, finance, administration, audit and operations, all of which are arguably experiences that could prove valuable in risk management.

Internal versus external selections

Wells Fargo’s most recent externally hired CRO poses the question of the value in hiring externally versus internally, particularly because the former breaks the norm for a bank of its financial breadth. Traditionally, even as of 2018, 62 percent of CROs were selected from the bank’s internal pool of candidates, while only 36 percent were sourced externally. Again, larger banks with assets over $250 billion differed significantly from smaller ones in that only 15 percent had externally hired for the position versus 43 percent of smaller competitors, proving Well Fargo’s decision to be a statistical scarcity.

Gender Diversity

Wells Fargo’s recently hired CRO is a female; the next female CRO in banking does not appear until the bank ranked #18 (American Express). Furthermore, only one female holds the CRO position for a bank with assets over $250 billion, making this gender a rarity in the financial space.

Historically, the CRO position has shown to be male dominated, with 90 percent of male CROs in 2017 down slightly to 86 percent in 2018.

What the future holds

If the above findings were to serve as predictors, it’s evident that the composite qualifications and backgrounds of CROs will only continue to grow increasingly diverse. Drawing from these statistics, we can surmise that, as leaders in risk, CROs will continue to require an astute understanding of business regulations while also serving as thought leaders who understand the basics of technology and data.

However, instead of being credit experts, CROs will need to be well versed in nonfinancial risks as well. In fact, as far as speculations go, it’s likely that the role may even diverge into two – one as CRO and one as chief credit officer – to make it more apparent that these components require management through two distinguished roles and skillsets.

Download Second Line Advisors’ Chief Risk Officer fact sheet for a full analysis.

Daniel Solo is the Founder of Second Line Advisors and is an industry leading expert within the Risk, Regulatory and Compliance functions since 1999. He has conducted searches for executives in the compliance, risk, legal, internal audit and regulatory affairs functions throughout the world, particularly in Financial Services.  His portfolio of work includes Chief Compliance Officers, Chief Risk Officers, Chief Auditors and Chief Legal Officers. He has been noted in various industry periodicals and is engaged in industry events with The Clearing House, SIFMA, ACAMS, RMA and GARP.

Banking

ECB stays put but warns about surge in infections

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ECB stays put but warns about surge in infections 1

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.

Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.

But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.

“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.

Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.

Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.

She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.

The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.

MORE STIMULUS?

Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.

Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.

But she signalled those risks were less acute, in part thanks to the recent Brexit deal.

“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”

Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.

“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.

Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.

There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.

The ECB has indicated it may not even need it to use it all.

“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.

Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.

Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.

With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.

(Editing by Catherine Evans)

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Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger

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Bank of Japan lifts next year's growth forecast, saves ammunition as virus risks linger 2

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.

BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.

“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.

As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.

In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.

But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.

“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”

While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.

“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.

NO EXIT EYED

Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.

Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.

Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.

He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.

“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”

(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks 3

WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.

The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.

This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.

(Reporting by Andrea Shalal; Editing by Chris Rees

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