… in my ET column, Managing risk in today’s world (…) [I] spell out some dos and donts.
My point is that risk management is a governance issue and is a matter of sound management and regulation- it’s not just about models and rocket scientists. You need to get the whole culture of and incentives in a bank right for risk management to succeed. Wide dissemination of information on risk exposures and participation of a large number of people are crucial to risk management.
This last is where Indian public sector banks score. They have officer as well as staff representatives on the board. These people are watching managers all the time. They not only know about lending decisions but also about the lifestyles of managers. When the chairman throws a wedding party, employees are watching- how lavish it is, who attends, what is the body language, what sort of gifts are exchanged. They talk about these things. This sort of employee watchfulness is an excellent risk management tool. Because very often it is not lack of knowledge, but mala fide intent, that underlies bad business decisions.
Take a look!