The Role of Chief Risk Officers (CRO)

A couple of weeks ago, I had an opportunity to speak at a round table with the Chief Risk Officers (CROs) of 25 leading Indian banks. We debated on the role of the CRO and the importance of this function in today's dynamic environment. Here is my take on the top five points of debate, which seemed to be plaguing the industry:

Objective and unbiased opinions count: CROs are respected if they bring a strong value proposition to the business that help in creating better assets, better deals and better decision making. However, the reality tells a different story where CROs many a times do not actively engage business stakeholders and consider themselves as auditors and vigilance officers. Thus, the true value of the CRO function is wherein they participate in the decision making process and business incorporates risk policies and guidelines as a culture into the business decision.

Core value proposition is to reduce volatility: The group agreed that the most important value proposition of the CRO is to reduce the income and valuation volatility of the bank. Thus, the CRO has a definite role in enhancing the market value of the bank. However, this will happen only when the CRO has built a very strong eco-system to measure risk, provide guidance and structure risk mitigation into products and transactions, which still seems to be a challenge today at many of the banks.

Custodians of risk appetite: The Board of Directors keep defining and refining the risk appetite of the bank. Thus, one point of view was around CROs being an extension of the board - ensuring the bank works within the boundaries of the defined risk appetite at all times. The CRO can accomplish this by influencing and challenging business decisions through effective risk measurement.

Risk culture has to be embedded: The conviction of foresight supported by risk measurement hindsight should be so strong that risk policies are voluntarily adopted and enforced as a first line of defense - by business managers themselves. The Risk Function, which acts as the second line of defense best performs when it is not triggered. However, given the business realities and pressures, the first line of defense forgoes risk management for business growth while the risk management function ends up enforcing the risk policies.

A strong information eco-system and benchmarks is needed: The CRO needs to go beyond risk as a compliance function and strengthen the risk measurement eco-system. This requires the CRO to have access to information and risk measures such as industry transition metrics, interest rate risks, portfolio management, economic capital, stress testing, sensitivity and VaR models, liquidity risk models, concentration models, fraud risk models, and cyber risk models. The CRO should also build sophistication in the bank’s risk measurement infrastructure including - a sufficiently robust data architecture and information technology infrastructure, which should keep pace with size of the balance sheet and revenue growth. While all these are important needs, it seems that the risk managing function at many banks in India do not yet have a mature risk measurement eco-system, which are available to some of the best run banks.

In summary we agreed that an effective CRO function is critical to the proper functioning of the banking sector as well as the economy.

About the Author

Mohan Bhatia is the General Manager and Domain Consulting Head for the BFSI Risk and Compliance unit. In his role he is responsible for capability development, thought leadership, developing innovative business and delivery models, engaging CROs, CFOs and CCOs, client satisfaction, engaging the analyst community, and revenues of the unit.

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