A formula for risk staffing drives the transition from Risk Adminstration to Risk Value Add

RWA

This is pretty intuitive. An organization with $300bn of RWA focused on operational risk is likely going to need a lot more people than one which has $60bn of RWA. Not necessarily 5x — but directionally at least.

Average salary

To be honest — I put that in here because RWA’s are measured in billions and the numbers are so huge we need to convert this to capital by dividing by 12.5 — and then convert into people by dividing by an average salary. Assuming an average salary of $200k per person a firm with $300bn op risk rwa ($24bn capital) would result in over 100,000 people. This is why the other factors of the formula come to the forefront.

Risk Maturity

Here’s the challenge — we don’t know what we don’t know. Back in 2003 Operational Risk was in its infancy. At that time, looking at past losses, most organizations thought that the ‘one in 1000 year event’ (the Basel capital standard) would be around $4bn of losses or about $50bn of rwa’s.

Front Line Maturity

Its 100% true that the business, or front line, must understand and own its risks. Risk Management is never someonelse’s job. That then sets the perpetual temptation that in nirvana front line units are so effective in managing risk that we only need a small second line of defense. I don’t want to say that’s nirvana is impossible because but I can say that in my 20 years of experience we have not reached nirvana yet!

Systems of Record

Think about credit risk or market risk. What do they have that operational risk does not have? Answer GREAT SYSTEMS OF RECORD. Its not “ SOME” loans that are entered into credit risk systems but rather “ EVERY LOAN”. Its not some trading risk position — but rather every trading risk position. You get the picture. Great systems of record — updated timely allow firms to manage risks better.

Data Quality

Data Quality has always been critical — but it took the publication of BCBS 239 in 2013 to establish standards to ensure reporting to boards of directors are complete and accurate.

Putting it together

While I don’t have all the coefficients empirically tested — I do know this — having great systems of record and great data can make a huge impact on the staffing levels of risk functions. I’d easily guess this to be coefficients of 10 — each — so a 100x benefit.

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I’ve always been logically driven. I like to think I look at things broadly and draw observations that may not be represented by main stream media.

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Julian Fry

Julian Fry

I’ve always been logically driven. I like to think I look at things broadly and draw observations that may not be represented by main stream media.