Highlights of the RMA Risk Management Conference

RMA Journal, The, Nov, 2003

* Do you know the potential magnitude of risks that are in the small tail not measured by VaR?

* What low-probability, high-cost events should be considered?

* Because things feel a little better out there, have you already begun to relax your standards--for any type of risk?

Success lies in discipline and an intense focus on execution. The concept of risk and reward must be embedded deep within an institution. And intuition must be supplemented with much stronger fact-based decision making. Six Sigma--a tool to increase the predictability and reduce the variation of an outcome--is helping Bank of America get to the facts. Success with Six Sigma, however, depends on identifying the projects on which it can have the most impact. Applying it to a proliferation of projects will result in failure. We launched Six Sigma in risk management about 18 months ago. Today, we forecast that 71 major projects focusing on four key areas of risk management will yield a significant portion of the company-wide impact through a combination of reduced losses, increased revenues, and reduced expenses.

Transformation of a risk culture, however, goes far beyond tools, methodologies, and disciplines. A successful equation also includes the right talent, constant performance management, clear connections between risk results and compensation, clear accountabilities, and leadership throughout the company.

Our company holds up a set of values that are as important as all of our policies and procedures combined. Three in particular are stressed in Risk Management. The first is courage to say what needs to be said and to do what needs to be done if it is the right thing to do. The second is candor--the necessity in today's pressure-filled business environment to speak honestly, constructively, and, most of all, openly. The third is common sense--there is no substitute for it.

Risk managers are uniquely positioned to redefine and drive better risk-reward results. If we do that, we can change our institutions. And if we change our institutions, we can change our industry. And if we change banking, we strengthen the most important economy in the world.

"Low unemployment is good for the economy in the long run," said Dr. Alice Rivlin, Brookings Institution economist. Companies are incented to train and use the existing workforce to the fullest. A frank discussion of the economy based on long-term and short-term benefits and perils gave participants quite a bit to talk about after Rivlin's address. Real growth comes only after a long series of painful compromises with "no sacred cows." Her advice for the short term: Don't make things any worse. Any increase in federal spending must be paid for by tax increases or trade-offs. We cannot assume "we'll grow out of it." The current buildup in deficits will take a large toll in the not-so-distant future.