February 2019 | Finance
In the decade since the RMA/Wharton Advanced Risk Management Program began, the field of risk management has undergone a transformation. Academic Director, Jacob Safra Professor of International Banking, and Wharton Professor of Finance Richard Herring has had a front row seat for all of it.
“Our first program was in 2007 and we’ve offered it every year except for 2009 when, ironically, risk managers were much too busy dealing with realizations of risk to take time away from their jobs to think about how to manage risk more effectively. While the fundamental issues of how to identify, measure, and manage risk have remained the same since the program was first offered, more than two-thirds of the sessions are different today. Many, in fact, deal with issues that were not even on the agenda when the curriculum was first planned,” he notes.
“A successful risk manager today,” says Herring, “requires a broad set of analytical skills as well as managerial and communications expertise to cope with the increasing demands of the position. Regulatory requirements have obliged risk managers to collect, organize, and model vast quantities of data to evaluate an institution’s exposures to risk and its capacity to weather severely adverse scenarios. Continuing pressures to reduce costs have led many institutions to outsource various processes, which risk managers must evaluate and monitor as if they were still conducted within the institution. In addition, they must consider how technological advances such as AI and machine learning can enable them to manage risks at lower costs. More broadly, regulators have taken to heart Peter Drucker’s observation that ‘Culture eats strategy for breakfast,’ and so risk managers are tasked with developing and sustaining a strong risk culture that ensures the risk appetite chosen by the board permeates the institution. The Advanced Risk Management Program attempts to keep up with all of these changes.”
The program was developed as a joint venture between the Wharton Financial Institutions Center and the Risk Management Association (RMA). The objectives were to accelerate the adoption of best practices and to provide a means for specialists in one aspect of risk — such as credit, market, or operational risk — to gain the breadth of knowledge and managerial skills necessary to take on greater responsibilities and ultimately become chief risk officers. The curriculum was developed over a year-long series of meetings that combined the insights of senior risk managers from the Risk Management Association, financial executives from the board of the Wharton Financial Institutions Center, and academic specialists in finance and management — an unusual blend of academic and industry expertise. It has evolved over time in response to feedback from participants in the program, several of whom have subsequently become chief risk officers and have returned to share their insights.
“Advanced Risk Management stands out,” says Herring, “because it combines analytical and managerial skills that enable participants to develop an enterprise-wide view of risk. While you can gain technical details about various risk disciplines in a number of other venues, including one-off conferences, participants find that the opportunity to integrate analytical and managerial knowledge alongside peers from a variety of other institutions adds significant value.”
The design of the program, which takes place over two non-consecutive weeks, helps participants bring their new insights back to their home institution. “We start by building a common analytical foundation and overview of current developments in risk management, drawing on the insights of Wharton faculty members and industry experts,” Herring explains. “During the first week the participants are organized in teams and charged with conducting a best practices survey during the interval before the final week of the program. Each team focuses on how a particular risk — such as market risk, fraud, or wholesale credit risk — is managed. The key rule in organizing the teams is that participants must choose to join a team that focuses on a risk that is not normally part of their responsibility. This ensures that they broaden their understanding of their home institution.
“Team members often collaborate virtually while they are away, and when they return to campus each team makes a presentation comparing and contrasting the range of practices they have identified to the rest of their class, which includes classmates who have expertise in managing these risks in their home institutions. This sets the stage for a lively discussion about best practices and the identification of key questions a risk manager should pose to ensure these risks receive appropriate attention.”
Herring says close interaction of participants over the two-week period encourages candid exchanges of views and facilitates the development of valuable networks among peer professionals that extend long after the program has concluded. This was one of the highlights for Jean-Sébastien Grisé, vice president of credit risk, commercial, retail, and wealth management at National Bank of Canada in Montreal. “The course gave me many industry contacts,” he says. “It was a very diverse group geographically, in the types of risk in which people operate, and the types of financial institutions. This yielded really unique perspectives.”
Herring notes a long list of new challenges for risk managers, which the program addresses, including pressure from a number of less-regulated providers of financial services and the introduction of new technologies that may threaten the position of incumbent players. But the greatest medium-term challenge may be an internal one.
“During a crisis, for both internal and external regulatory reasons the influence of risk managers expanded markedly, as did the number of employees engaged in measuring, monitoring, and managing risks. To some extent, risk managers may become victims of their own success. When things are going relatively well and memories of the crisis recede,” says Herring, “the internal support for risk management inevitably declines. The challenge is to integrate risk management as part of an institution’s standard operating procedures, including strategic planning. Although regulatory support for strengthening the risk management function is strong at the moment, in the longer run risk managers must demonstrate their value to the institution. This means that senior risk managers must gain a strong understanding of the business as a whole and be able to make a persuasive case that effective risk management adds significant value. The Risk Management Program aims to provide risk managers with the tools to do just that.”
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