Who’s the Best on Wall Street: Risk Management Report Card
It’s no secret that the 2008 financial crisis revealed enormous holes in our banking system’s risk management. But since then a lot of things have changed.
After giving banks free rein in the period that led up to the financial crisis, regulators are now doing their best to make up for their former lax oversight. They’ve forced banks to hold more capital, boost the amount of cash they’ve got available for unforeseen market blowups, and even test the vulnerability of their businesses to events beyond their control.
Bankers say their risk cultures and internal controls have changed significantly since the crisis. All of the biggest banks have spent significant money on sprucing up systems to deliver the kind of data and analysis that Fed stress tests require. They say they’re going beyond the Fed’s mandates and have dramatically increased their own stress testing.
We decided to ask the experts if this was true. We polled a couple dozen equity analysts who cover Bank of America , Citigroup , Goldman Sachs , JPMorgan Chase and Morgan Stanley .
We gave five factors to rate on how these companies manage risk. We got comprehensive answers from a third of them. We decided to turn the results into a report card. We also asked a few separate questions on what matters the most in risk management. Below are the results.
Our first question was direct: Who’s the best risk manager on Wall Street? Hands down the answer was Goldman Sachs.
“If you said, ‘I just landed from the future and this is what is going to unfold over the next couple of years and some companies are not going to survive and some companies are going to pick up share, and do much better on a relative basis,’ you wouldn’t have gotten all of them right, but you definitely would have had Goldman and JPMorgan on this side, and it is because of their risk managements,” said Glenn Schorr, analyst at Nomura.
We also asked who had the worst risk management. That came up with a tie — between Bank of America, Citigroup and Morgan Stanley.
(Read More: Biggest Risk Management Debacles.)
We asked the analysts to assess the risk management at these firms based on the strength of their risk culture, whether they hold their traders to strict trading limits, how good they are at managing their own complexity and business focus, the strength of their capital ratios and their liquidity.
Here are the results:
Once again Goldman is at the top of the list, and is perceived to have the strongest risk culture. Its $175 billion liquidity cushion helps, as does its strict limits on trading.
It’s the industry consensus that risk management is deeply encoded in the Goldman DNA. It carries over from the days of the partnership, when every executive at the firm had their personal wealth on the line.
One former exec told CNBC a story that has become legend at Goldman, where risk reports to the chief financial officer. Goldman did a major overhaul of its risk systems in 1994 when the survival of the partnership was threatened by massive losses from a wrong way bet on interest rates. Around that time, David Blood, then CFO of Europe, put the kibosh on a trade by a UK trader. The trader threatened Blood with losing his job. The spat was escalated up the chain to Stephen Friedman, at that time chairman of the executive committee. Friedman delivered the following message personally to the trader: “If you ever say that to one of our controllers again, YOU’ll be fired.”
While the retirement of CFO David Viniar — who held that position during the entire time since the firm went public — is a loss to the firm, analyst Schorr said the structure of the risk management organization is so strong that the firm will not miss a beat when Harvey Schwartz takes over.
What had rival bankers griping.
In the analyst survey, Goldman is fairly closely followed by JPMorgan Chase — the Whale debacle notwithstanding. (Read More: 'London Whale' Was Urged to Boost Valuations: Report.)