Copyright © 2017 by International Business Machines Corporation (“IBM”). All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
The following terms are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both: IBM, the IBM Press logo, and IBM Watson. A current list of IBM trademarks is available on the web at “copyright and trademark information” as www.ibm.com/legal/copytrade.shtml.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data is available
ISBN 9781119380146 (Hardcover)
ISBN 9781119380177 (ePDF)
ISBN 9781119380153 (ePub)
Cover Design: Wiley
Cover Image: © Photo by.Ignacio Ayestaran/Getty Images
Introduction: A Risky Business
The managing director for risk fixed him with skeptical blue eyes, “you are probably the most dangerous person at this Bank”. I was incredulous. She wasn’t talking to a swaggering trader. She was talking to her supposedly close colleague, the Head of the Global Policy Office at the Bank. The discussion for the last hour had been about the need to strengthen global compliance policies for Sales and Trading in the aftermath of the 2008 Financial Crisis. Surely, I thought, the danger must lie elsewhere.
Why do I open with this story? In many ways it’s symptomatic of what was wrong at banks before and after the 2008 Financial Crisis. There were traders losing money hand over fist, in some cases, to the point of taking their banks over the edge during The Crisis, yet the MD perceived the greater threat as stemming from the Global Policy Office. Really? The pre-Crisis view was that traders should be left more or less alone by Risk and Compliance to work their magic. This did not work out so well in retrospect. After The Crisis a new belief took hold, almost as pervasive and erroneous as the “let traders be traders” view. The new belief was that rigorous enforcement of new policies and procedures would lead almost magically to prevention of wrongdoing. The MD, perfectly cognizant of this, was afraid that risk managers would retreat behind a bureaucrat’s desk rather than engaging with day-to-day activity on the trading floor and that the effects would be just as bad as previously. Sadly, in her defense, to a significant extent it’s my view that this is what has gone wrong after the crisis.
The evidence presented in this book suggests that both these factors have been at play in the years since the Financial Crisis. The strengthened regulatory and compliance regime imposed since the 2008 Financial Crisis this has not yet resulted in a corresponding reduction in operational risk events and failures.