Banks adjust to new risk culture

Financial firms stress their risk management credentials, but frauds and failures are likely to grab future headlines unless incentives are appropriate.

Banks are in the risk business. Assessing, quantifying and acting on the trade-off between risk and potential return of a loan, a transaction or project is what they do. Their staff or at least the rainmakers and top traders are highly paid for their expertise and the success of their judgments. Hefty profits are channeled upwards as bonuses to senior management and across to shareholders as dividends and share price performance.

Well, apart from retention of the bonus culture despite taxpayer bailouts and governmental support, we all know that this model imploded with destructive consequences across all parts of the global economy in 2008. Market-risk systems based on probability assumptions...

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