It is up to risk management teams in investment banks to make sure the bank doesn’t take exceed its risk appetite and potentially make huge losses in its pursuit of gigantic profits.
As just about every investment bank has had to write off billions of dollars during the global financial crisis, the focus on a more prudent investment strategy has never been greater.
While risk managers try to stop a bank’s employees indulging in behaviour that might lead to big losses, compliance teams are there to ensure banks are working in line with the regulations imposed in the countries in which they operate.
Since the financial crisis, regulators across the world have increasingly been baring their teeth. With regulators in different countries so far adopting different approaches, there have been increasing calls for more international coordination on how best to reform financial services regulation.
One of most sweeping forms of regulation in Europe is Basel III, which places more stringent demands on the amount of capital banks are required to hold. The Dodd-Frank act in the U.S., introduced by the Obama administration to rein in ‘too big to fail’ banks, has also placed a greater compliance burden on banks.
This has created more work for risk and compliance teams and increased hiring – Morgan Stanley, for instance, has doubled its risk headcount since the financial crisis and HSBC has said that the need to hire more compliance employees has hampered its ability to recruit revenue-generating staff.
In the UK, the Bank of England, along with the relatively new Financial Conduct Authority and the Prudential Regulatory Authority, have taken over from the Financial Services Authority to run the regulatory regime.
In the US, the Securities and Exchange Commission is the financial watchdog. In Asia, the Securities and Futures Commission regulates Hong Kong, while Singapore is under the watchful eye of the Monetary Authority of Singapore.
As well as individual country watchdogs, European firms are also regulated by the Committee for European Securities Regulation, the Committee of European Banking Supervisors and the Committee of European Insurance and Occupational Pension Supervisors.
Jobs and career paths within risk and compliance
Risk management jobs in investment banks are divided into different areas of risk.
Market risk — The risk that a group of traded financial products (e.g. stocks, bonds or commodities) falling in value simultaneously because of outside events, such as rising oil prices or terrorist attacks. Also known as ‘systemic risk’.
Credit risk — The risk that a particular company or an individual defaulting on their obligation to repay their debts.
Operational risk — The risk that a bank incurring damage or losses due to internal factors, such as systems breakdown or financial wrongdoing.
If you join an investment bank as a graduate trainee, you are likely to be ‘rotated’ around different areas of the risk function.
Compliance roles in investment banks can also be divided into various categories.
Sales and trading compliance — Working with a bank’s salespeople and traders to ensure their activities comply with the requirements of the local regulator. Sales and trading compliance pros are often product specialists – for example, they might specialise in bonds, equities or derivatives.
Control room compliance — Centralised tasks such as maintaining the bank’s restricted list (which restricts confidential information to key individuals) and checking for abnormal or alarming dealing activity. Should certain staff be placed on ‘stop and watch’ lists, it is the control room compliance team that ensures they are stopped and watched.
Monitoring and surveillance — Scrutinising specific behaviour and transactions that might indicate fraudulent activity, such as insider dealing or manipulation of markets across the exchanges.
Anti-money laundering — Stopping money laundering (where the financial proceeds of illegal activities are given the appearance of being legitimate).
Skills investment banks want from compliance and risk employees
Perhaps slightly surprisingly, among the key attributes banks look for in their compliance and risk recruits are good communication skills and an ability to build relationships. Employees in this area are becomingly increasingly central figures within the organisation, and an ability to effectively explain complex issues to people elsewhere in the business is key.
“Graduates need intellectual curiosity, the ability to interpret information quickly, attention for detail and good communication skills,” said Charles Eve, head of compliance, EMEA at Goldman Sachs.
Risk managers need to make often difficult decisions and may ruffle a few feathers, particularly with traders who feel they should be able to increase their risk tolerance. In practice, this means having a keen eye for detail, and questioning often perceived wisdom within the organisation – and speaking out when you know that something is wrong. One of the criticisms levelled at risk and compliance teams during the financial crisis is that they failed to rein in the trading teams, so banks are keen to make their middle office employees more forthright.
“Compliance in recent years has become a key function for the investment banking industry. It demands high standards and a high level of accountability,” said Eve. “We look for analytical individuals with excellent project management skills and a keen interest in financial markets, products, and securities laws and regulations.”
Risk management is a technical discipline, so graduates often have to come armed with applied mathematics skills, an understanding of differential equations and financial modelling. They have to apply this to a real life situation though, so banks also look for keen problem solving skills.
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