Giving credit where credit receives its due: An Interview with Marco Suter

RMA Journal, The, March, 2002 by Nicholas Hayes, Beverly Foster

On a global level, UBS has two core businesses: wealth management and investment banking. In these businesses, the Group serves clients ranging from affluent individuals to multinational institutions and corporations. Where needed and where we have the necessary infrastructure and expertise, we also provide these customers commercial banking services, including lending. Because we often find that the return on risk is not optimal in commercial lending we are very cautious and selective in the use of our balance sheet. In this sense, our strategy is not much different from our main competitors. If we grant loans for relationship reasons, we make sure that we manage our exposures and reduce concentrations through syndication and, increasingly, credit derivatives.

RMAJ: As risk management has steadily moved from avoiding credit risk to tactical risk-taking, what sorts of change--structurally and culturally--have taken place within your organization?

MS: Culturally this transformation has happened gradually and is an ongoing process. The first decisions were taken a long time ago by segregating origination from risk management and risk management from risk control. This has automatically led to an active management of our loan portfolio, first from a risk/reward perspective and second with respect to making use of the opportunities for loan sales, syndications, or credit derivatives. The move away from loss avoidance to ex post risk control stems from the fact that credit risks, which had been viewed as very sticky--once you owned a credit risk, you lived with it--are becoming increasingly liquid. The emerging approach therefore leaves more authority for individual risk taking with the business and requires that three conditions be met.

1. There must be a strong risk culture across the enterprise. Traders and loan officers must feel responsible for the outcome and actively manage their credit risk exposures. Credit risk management is, therefore, a business function.

2. Risks must be grouped by liquidity. Those that can be managed can go into the new paradigm; those that cannot be managed must be subject to a very strong pre-approval process. It goes without saying that a business model that grants significant authorities to the front line requires that individual positions be relatively liquid so that they can be changed if the resulting risk profile exceeds the institution's risk appetite.

3. A set of hard limits must be put in place within which the business is authorized to operate. A limit system must ensure that no one can "bet the bank" with a single decision and that risk concentrations (emerging markets, industries, and so forth) are well controlled.

Given the credit risk management tools and techniques we now have in place, we can meet our customers' demands and at the same time have the quality of risk that suits our risk appetite.

RMAJ: What can you tell us about the bank's internal risk-ratings system? And at the end of the day, who "owns" the rating?