Banking risk-management: post-crisis knockout

Nobody knows nothing: the world financial crisis proved to be much more profound and lengthy than was ever expected by anybody including bank risk-managers. The best way to protect from risks in time of current ambiguity is to cut down credit operations and go liquid to the maximum extent. The world commodity and stock markets try to regain balance - making goals and purposes of risk-management quite vague. On the one hand, trend to minimize risks demands more rigorous evaluation models. On the other hand, risk-managers hold their breath, reading news from information agencies and observing queues in their offices: suppose the moment arrives, when risk-management would be totally helpless. Under such circumstances a bank may be saved by its shareholders only, old or new ones.

Necessary respite: crisis phenomena make risk-control more important, allowing risk-managers to adapt management systems to changing conditions. In time of "credit boom" banks wanted larger market share and gave credits on milder terms and softened risk-management demands. The same was true related to market risks: growing markets encouraged risky steps. Presently attitude to risks is more prudent: 40.7% of respondent banks made credit conditions to corporate borrowers tougher, 51.8% - to individual borrowers. Number of risk managers in respondent banks almost doubled, and general employment went up by only 29%.

Blessing in disguise: crisis of individual "bad debts" does not seem to be a serious problem any longer. Limited credit activity in banks improved the situation with private outstanding debts: within six months of the current year the figure went up by 0.1 percentage point and reached 3.3%. New credit conditions with new scoring models and increased rates restricted the retail segment dynamics. Accumulation of bad debts on bank accounts was suspended to make mid-term "bad debt" crisis quite improbable.

Market risks are under control, even in the most desperate situation. Against the background of financial uncertainty volumes of market risks towards total capital decreased from 45.1% by 01.01.2007 to 40.4% by 01.07.2008. In time of bouncing interest rates the share of interest risks reached 66% by July 2008 from 42.9% at the beginning of 2007. In September the figures no longer reflected real situation: REPO settlement delays found its victims, the most outrageous being KIT-Finance - right after option payments with RTS index and feverish attempts to find liquidity it was actually nationalized, - same as Sviaz-Bank, playing too much with inter-banк credits.

Expecting fraudsters: presently IT system faults constitute the most dangerous operation risks, but in future fraud will top the list. In 2007 our respondent banks reported losses three times as big comparing with 2006, with no change in business models and relatively law growth rates. It implies positive changes in the control area, since actual growth could not be so big. The largest share in the structure of losses is taken by faulty operations in systems and processes (55%), and fraud approximates 3%. We forecast fraud to be the largest operational risk for banks in the future. 30% of respondent banks plan to introduce ISO 9000 in their offices within the next couple of years. Structured business-processes simplify the process of catching and eliminating "slack" elements which might generate operation risks.