Magazine article Risk Management

CROs and Subprime Lending

Magazine article Risk Management

CROs and Subprime Lending

Article excerpt

As the subprime mortgage crisis continues to reverberate throughout the U.S. and global economies, the fallout is increasingly affecting the entire business world. For some insight and perspective on the role of risk management in all of this, we turned to expert Miles Everson, partner and head of governance, risk and compliance services at Pricewaterhousecoopers.

RM: How has the subprime crisis underscored the need for financial firms to have a chief risk officer?

Miles Everson: Current conditions do underscore the need for better use of the CRO. The CRO should have an overview of risk being taken by businesses functions or product groups. It underscores the need for the CRO to create transparency around the aggregate exposures that exist in those businesses or portfolios.

I think in the business units and product groups there was an element that was known, and there was an element that was unknown. I say that because in the liquidity markets it went south so quickly. The stress tests that were in the system didn't envision the rate at which that liquidity for those products would dry up. I think that most CROs would step back and say that better insight would have been helpful for them making the case based on their "intuition factor."

RM: How might a CRO help to prevent something like this in the future?

Everson: Presumably, for the known exposures, there was an element of "We know the risk is there and we're going to take the risk management and get paid for it." What we don't know--and we haven't seen--is how much of this was known versus what was unknown. And it's hard to get that from public information.

In some respects, you can look at it and say that the CRO should help manage risk given the business model you have. The other view is to look to the CRO to figure out how you might alter the business model so that you have a better line of sight at the risk you're taking.

Let's face it, in a number of complex organizations you have multiple businesses or product groups trading in similar securities or products and to get that aggregate view, frankly, it's very difficult.

The other way CROs can be helpful is trying to put some independent perspective into the complexity of the product, and gauge whether that complexity hampers the transparency you have in the risk associated with those products. …

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