Risk in the New Millennium

By Thomas P. Johnson Jr.

As the booming '90s draw to a close, managers must reaffirm their dedication to effective risk management.

Risk management is often viewed as unglamorous, especially in good times, but this essential activity is taking on greater importance as the century draws to a close. Y2K will challenge institutions across almost every dimension, including trading. Meanwhile, regulators and bankers continue to voice concern about eroding underwriting standards, and rumblings of cyber-crime grow louder as commerce migrates online.

These issues serve as a reminder that the outward-facing aspects of the business -- marketing, product development and business line expansion -- do not exist unto themselves, but rather must function within a carefully-managed framework. Amid the cacophony of calls for strategic action, managers must remain mindful that certain fundamental disciplines keep their institutions functioning on a moment-to-moment basis.

Y2K could be called the new century's first major risk management test. As detailed in this issue by Clint Swift, BAI's director of banking technology, U.S. banks seem to have done a good job cleansing internal systems of the computer bug that will spring to life at the new millennium's dawn. Now they must deal with a host of external issues -- consumer confidence, borrower and supplier stability, counter-party integrity -- that are even more difficult to control.

International risk remains a particularly elusive Y2K problem. Swift, who has spent the past year talking to bankers and other experts about Y2K issues, says US banks with overseas operations will need to pay attention to foreign transactions and counter-parties since the remedial work done in some developing countries appears lacking.

An analysis by contributing writer Robert England shows how international risk -- in this case, a currency collapse -- can affect US institutions. During last year's global financial crisis, money center banks learned once again how risk can ricochet from one country to the next. Even when the US economy is doing well, domestic banks are not insulated from troubles in other parts of the world.

Cyber-crime also has an international dimension. The very networks that unlock the power of the computer leave institutions more vulnerable to abuse and criminal activity, from anywhere in the world. Exposure can spring from within institutions as well. Contributing author Paul Sweeney shows how internal fraud reinforces the need for systematic efforts to protect information.

Risk management may not be the most exciting topic in banking, but in an industry built on public trust, it is the glue that holds the entire enterprise together. Managers have no choice but to evaluate exposures constantly. After all, stress tests performed inadequately today will be administered on far more rigorous terms by the market tomorrow.

Copyright © 2003 by Banking Strategies, published by BAI.

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