The Risk Manager’s Dilemma

Lloyds recently announced that they’re cutting a large number of risk managers because the group was hindering “intelligent risk-taking” (Bloomberg). This will pan out in a couple of years either in the bank’s earnings results or fines from the regulators but, whatever the outcome, this is a good example of the risk manager’s dilemma: how to balance:

• The law and regulatory requirements

• The business’s objectives and culture

• The individual’s sense of what’s right

The dilemma is that these three won’t always be in alignment. And often, they shouldn’t be: a risk management system works best when it’s under a healthy degree of tension. We want a robust back-and-forth between an aggressive COO and a cautious CRO. That’s going to help the firm take manageable risks without getting into too much trouble. 

Why Lloyds couldn’t get this balance right isn’t clear yet. Maybe these individuals were far too cautious. Perhaps the bank wants a looser interpretation of the rules that the risk managers weren’t happy to sign off on. Again, only time will tell.

But every risk manager has to triangulate between these three points to find a workable (I won’t say happy) medium where things are balanced. That’s hard and necessary, but as stories like this illustrate, it’s not always possible.

Quite the dilemma.