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The Investment Banking Revolution: From “Risk Management” to “Risk Innovation”

Date: 25 September 2015

After the 2008 Financial Crisis, it became clear that the banking industry needed to rethink its approach to risk management. Sweeping regulatory reforms have revolutionized the way investment banks do business, which in turn, has greatly impacted the talent landscape.

Sweeping regulatory reforms have
greatly impacted the talent landscape.

Many of the Ph.D. mathematicians that once sat in dark corners of the trading floor developing exotic pricing models are now using statistics to develop risk models and presenting to regulators. Former traders have moved from the trading floor to the middle and back office in risk governance, strategy, and compliance roles. Technologists have become more central to the industry as organizations view IT security as increasingly critical and tech systems as a way to improve efficiency and thus, profit.

Within financial institutions, business units, such as proprietary trading, have been shut down while others have seen explosive growth, such as CCAR and compliance. Entirely new departments have been formed, such as the Goldman Sachs Environmental, Social and Governance group; headcounts have been re-allocated; and salaries have changed. However, there is one thing for sure in the post-2008 world: risk management has become a central function to every major financial institution.

The fall of exotic derivatives, structured credit and other high-risk trading practices has given rise to an increased demand in hiring for people that know how to create profit within a very risk-managed environment. Many industry veterans say that the atmosphere—particularly in the front office—is not as electric, not as dynamic, and not as sexy as it once was.

There is increased demand for banking professionals that know
how to create profit within a very risk-managed environment.

From an industry-wide perspective, many financial institutions have found it difficult to thrive in this new regulatory environment while some have struggled to even survive. Krishna Memani, Chief Investment Officer of OppenheimerFunds, recently told Business Insider that heavy regulation has, essentially, reduced once-glamorous financial institutions to mere “service providers”. 1

The outlook for the industry is actually not nearly as dull as some may make it makes it sound. In fact, it’s very positive. While the days of exotic derivatives and other highly-complex, risky trading have dwindled, the new frontier of profit is in the way banks optimize capital and manage risk within a tightly regulated environment.

The outlook for the industry is actually not nearly as dull
as some may make it makes it sound. In fact, it’s very positive.

Regardless of how much government regulation is imposed on banks, the trait that separates the winners from the losers will be the ability to balance risk management against the ever-present desire for profit. This requires innovation and a change in mentality away from “risk management as an obstacle” to “risk management as vehicle of profit”. Over the next decade, risk—similar to technology—will be a battleground for innovation within Financial Services.

Over the next decade, risk will be a battleground for innovation
within Financial Services.

It is also important to note that not all investment banks have been affected to the same degree. The difference comes from where the bank is headquartered given how increased regulation “trickles down” from the home office. European banks, such as RBS, Barclays, and UBS, seem to have been hit harder than Asian Banks, such as Mizuho and SMBC. To the surprise of some, several American banks have emerged in the post-2008 world as winners, such as Morgan Stanley, Goldman Sachs, and Wells Fargo.

Upon observation, among the financial institutions that have struggled most to thrive in a post-2008 world are those that have failed to innovate in a category as central as risk management. The organizations that will experience the most success in the future will be those that can attract and build integrated teams of “risk innovators”, not just “risk managers”.

Banking organizations must build integrated teams of
“risk innovators”, not just “risk managers”

One of the most valued assets (at both the individual and organizational level) to emerge over the next decade will be the ability to develop fresh ideas for managing risk. If you’re considering a move in the Banking job market, you’ll find it difficult to find a role that doesn’t involve some sort of risk management. Because of this, job seekers need to embrace this new culture and highlight the skills that complement it - be prepared to demonstrate, through your past experience, background checks, network and personality, that you are a risk adverse candidate.

If you are interested in how Selby Jennings can help with your “risk innovation” efforts, or are looking for a new opportunity within Banking, contact Selby Jennings today. 

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