Risk? What a yawn!
Thursday, February 22, 2007/
Like any comedy, meetings are all about timing. So when to gather banking’s finest to discuss risk?
Risk? What a yawn!
I’ve just returned from a presentation by our Head of Risk. His topic this month was our strategy to deal with the risk arising from our propensity to throw vast amounts of cash into highly leveraged transactions.
Although APRA, ASIC, and the Reserve Bank are concerned about highly leveraged transactions, our Head of Risk is not. His comfort, apparently, is due to the existence of the secondary debt market.
(Those familiar with the secondary debt market may skip this paragraph, but for those unfamiliar with the term, it is a market in which corporate debt is bought and sold. The market offers non-banks the opportunity to participate in corporate lending and allows lenders to increase or decrease their exposure to individual customers and industries. It is possible to sell a strong credit — that is, a debt owed by a well regarded borrower — at a premium, but weak credits will trade at a discount.)
Our Head of Risk explained that our participation in inherently high-risk transactions is mitigated by the ability to sell the loan through the secondary market if we see any worsening of the risk.
Of course, astute readers will realise that the price of the debt will plummet like a stone once the market becomes aware of the increased risk, so the trick is to identify the increased risk and get to the market before anyone else.
Our risk mitigation strategy, therefore, relies on our being more alert to changing conditions and more decisive than our competitors so that we can beat the market: banking’s equivalent of Spider-Man, as it were. If I have explained this clearly you will see that we need to do this for each of these loans, and that each of the various bankers involved in the process of selling the debt will require the same cat-like reflexes necessary to achieve a rapid response time.
When this was explained to the gathering there was no response or reaction of any kind from those present, which surprised your correspondent.
I’m not surprised that each of my colleagues sees him or herself as some kind of quick-of-eye, sure-of-foot banker-panther, capable of outmanoeuvring every other corporate banker in Australia.
But I was surprised that — apparently — they believed that every other one of the well-lunched banking bureaucrats in the room was up to the job of ninja-banking.
Just as I was wondering whether this piece would turn into an article about mass self-delusion, a far more pedestrian answer occurred to me. After all, it was after lunch.
Which leads me to conclude that our new policy — relying as it does upon those alert super-bankers — may be more effective if we can guarantee that no crisis occurs during the afternoon nap period.