Managing risk
February 7, 2011
Deutsche Bank has set up a new risk management center in Berlin in an effort to install robust early warning systems to guard against future shocks to the financial system.
The bank set up the specialist center in Germany's capital late in 2010 – citing the city's profile as a center of excellence in science and education – and will hire up to 300 staff by the end of this year.
The international risk management center will house specialist staff, including engineers, mathematicians, statisticians and lawyers along with people with degrees in business administration and specialist finance industry experience. Deutsche Bank said the total number of staff could rise to between 500 and 700 once the center becomes fully established.
'Holistic' view of risk
Hugo Bänziger, chief risk officer and member of the management board at Deutsche Bank in London, said: "The goal is to look at processes in risk management holistically, to better recognize potential reciprocal effects between different influencing factors and thus to be able to make decisions for the bank and for our customers more quickly and on a more substantiated basis."
Deutsche Bank said the risks monitored by the center would include all the major financial risks the investment bank faces, such as "market, liquidity and credit risk."
Specialist staff at the center will develop sophisticated risk models which identify potential financial risks by simulating various future scenarios which could have a major impact on global capital markets.
'Black swans'
However, many of the quantitative risk models used by investment banks manifestly failed to anticipate the sequence of events which led to the credit crunch and the great financial crisis of 2008. If financial markets followed the normal bell-shaped distribution curve used in quantitative financial models, the stock market crash of 1987, the interest-rate turmoil of 1992 and the 2008 crash would each be expected only once in the lifetime of the universe.
The role of unforeseen, high-impact and sometimes catastrophic events – named “black swans” after the eponymous best-selling book by former hedge fund manager Nassim Nicholas Taleb – has resulted in financial institutions across the globe reassessing the way financial risks are monitored.
Rohan Douglas, CEO of Quantifi, a specialist provider of risk management solutions in London, said Deutsche Bank's decision to set up the risk management center in Berlin was part of a wider industry trend of financial institutions updating risk management systems.
Morgan Stanley, the US investment bank, has doubled over the past two years the size of its risk management team while last year Société Générale, the Paris-based investment bank, launched a five-year plan - 'SG Ambition 2015' - which is aimed at implementing tighter cost and risk controls.
'Throwing money at the problem' not the answer
"Following from the credit crisis, banks and other financial institutions have recognized the need for transparent and comprehensive risk management across their business," Douglas told Deutsche Welle.
"The financial markets continue to increase in complexity. Risk management is also becoming increasingly important and complex. In many cases this has meant a rethink across the board for risk management approaches and infrastructure."
Paul Wilmott, a leading theorist in quantitative finance based in London, said it was a "natural step" for Deutsche Bank to set up the risk management institute, given that the leading German investment bank has always taken risk management seriously.
"But throwing money and bodies at the problem doesn't necessarily solve it," Wilmott said.
"I hope they won't be blinded by the received 'wisdom' of traditional risk management that really isn't all that wise and instead explore more robust methodologies and, most importantly, reintroduce common sense into investment banking."
Deutsche Bank, which currently has about 3,700 employees in Berlin, has located the international risk management center in Charlottenburg.
Author: Joe Morgan
Editor: Sam Edmonds