Celent Securities & Investments Newsletter, November 2012

5 November 2012

New York, NY, USA

Analyst's Point of View

Risk Decisions that Matter: What Financial Firms Can Learn

Recently, at a seminar at which I was presenting, I had the privilege to hear from a person for whom risk management is likely to be the most important aspect of his livelihood.

The speaker was Sir Ranulph Fiennes, the British adventurer described by The Guinness Book of World Records as "the world's greatest living explorer" (not to be confused with Ralph Fiennes, the actor, who is a cousin of his).

The title of his talk was "Risk Management in Life and Death Situations," and it centered on lessons learned in pushing himself to the limits. I have summarized (in certain cases, paraphrased) the risk management dimensions which I gleaned from his witty, humourous, and sometimes, soul cringing presentation. The principles are as follows:

1. Know your team members up close and personal. For big life and death expeditions, knowing the motivation and incentives of the team is important, but these are not sufficient to reach your end goals. You need to discern and understand the character of the individual members of the team, or face the risks of failure, or worse endanger the team's lives if there are serious weaknesses in a team member's character. Hence select your sojourners very carefully.

2. Be of "one mind." The team who is going to take risks is the same team who assesses the risks and reaps the rewards. You need to plan, operate, and execute with "one mind."

3. Assess your routes and research the terrain you are trying to conquer very carefully, especially the danger zones, pitfalls, and hidden crevices

4. Ensure you have the proper tools suitable for the terrain.

5. Face (and expect) adverse conditions, resistance, and "boring waiting periods" by maintaining discipline and endurance, with a relentless focus towards the end goal.

6. Adaptability and innovation are required (without compromising point 5).

7. Big picture plans and detailed tactical steps are equally important to execute towards the goal. Don't underestimate either.

8. Use political levers to get past roadblocks or rough terrain or to cut journey time (without compromising point 5).

9. Ensure timely monitoring mechanisms to gauge progress, safety checks to measure critical (team and personal) health indicators, and landmarks to determine closeness to target destinations

10. Plan against big risks. Try to avoid or go around these altogether rather than face them.

If there is one place risk management matters, this is it: when your life depends on it!

How much can financial institutions learn from these principles? A lot, I believe. And for some organizations, life and death may indeed depend on executing these principles in the years ahead.

Cubillas Ding
Research Director

Chart of the Month

From the Celent report Shadow Banking Products in Europe and North America: Different Seasonings for the Alphabet Soup.

Celent Published Reports

Research in Progress

The Future of the Agency Model in North America/Europe-Cash and Derivatives
Key Trends in the FX Options Market
The Future of Capital Markets Risk Management
Impact of EMIR for the Buy Side: New Legal Agreements, Clearing Agreements, Technology Needs, and Costs

Events

15 November 2012
Celent Securities & Investments Webinar: Client Reporting Tools Update

27 November 2012
Celent Securities & Investments Webinar: Equipping the Front Office for the New Risk Environment

For more information on these events or other Celent events, contact info@celent.com or call +1.617.262.3120.