Q4.6 2024

News of Archegos Capital founder Bill Hwang’s conviction on ten charges of securities fraud, wire fraud, conspiracy, racketeering, and market manipulation permeated the financial sphere last month. Hwang faces eighteen years on the inside to meditate on the fiasco, but the period of reflection extended to banks that fell victim to Hwang’s crimes was distinctly shorter.

In response to the scandal, Deutsche Bank (<$1B in losses) pivoted from speculative finance to fixed income trading, Nomura ($2.9 billion in losses) announced they were diversifying their portfolio to reduce reliance on US funds, and for Credit Suisse ($5.5 billion in losses), the Archegos debacle marked the opening strike in a flurry of body-blows that would eventually lead to acquisition by UBS. On the other hand, Goldman Sachs (minimal losses) had reason to be optimistic, as they unwound their positions more expediently than others, enabling them to reduce losses and solidify market dominance in the aftermath.

As is to be expected after significant risk failings, personnel changes ensued: C-Suite executives and regional heads of Hedge Funds/Alternatives teams were pushed towards the respective exit doors with varying degrees of force. This trend begs the questions: a) How do risk teams that have been shaken by scandal recover? and b) How are their hiring needs affected?

Growth

Unsurprisingly, regulators are the first at the door post-crisis. In the case of the Archegos fallout, regulatory scrutiny centred around extensive use of total return swaps and other highly leveraged instruments. More broadly, consent orders can be issued by regulators to deal with wide-ranging institutional risk issues, so recovering risk teams often need to up-size in response to scrutiny, especially if the bank intends to remain in the affected area.

Here, increases in headcount are most prevalent at opposing ends of the corporate spectrum: junior members of the team supply extra hands on deck when it comes to providing the required regulatory reporting, and senior individuals with a wealth of remediation/crisis management experience are highly sought after at the top end. This yearning for experienced leadership, which also encompasses consultants or fixed-term contractors, can lead to inflated compensation packages, particularly in the wake of an incident that entangles multiple financial institutions. Equally, retention bonuses can also be offered to in-house talent to help manage reputation – a tactic Credit Suisse briefly employed in the interim period between the Archegos fiasco and Silicon Valley Bank collapse.

Though reputational challenges can affect team morale and recruitment, particularly in the front office, risk talent often see regulatory scrutiny as an opportunity for influence – the chance to shape institutional reform and restore credibility. More generally, risk team numbers, especially on the non-financial risk side, are burgeoning in response to data reporting and cybersecurity requirements. However, this trending growth is likely to be arrested by the development of fintech products that utilise Artificial Intelligence and Machine Learning to provide reporting and due diligence solutions. For the time being, though, risk expertise at the top end is extremely valuable, especially when an institution seeks to recover from a period of significant losses.

Atrophy

Conversely, risk teams can shrink in response to crisis if the bank moves away from certain products or markets more broadly. A halt in onboarding new business, and the markedly lower bonuses that follow this statis, each increase the chances of talent churn. For individuals that stay put, opportunities to take on higher responsibilities are presented, but often these promotions are reflected in titles rather than notable increases in compensation. Equally, if there is any hesitation to approve replacement hires once individuals move elsewhere, the incumbent team members are burdened with that increased workload, again leading to increased churn. Ultimately, significant exodus can culminate in a strategic reappraisal of a team and sometimes complete dissolution. More common is absorption by a closely situated division or a restructuring towards global rather than regional coverage.

False Economies

Risk failings naturally turn attention towards compensation internally, and the questions that arise often centre around the balance between costs of a robust risk function versus losses avoided. A regional credit team at Tier 1-2 banking institutions can cost on headcount anywhere between $1-5 million dollars annually – a considerable sum in a world for a non-revenue-generating onshore function. However, the Hedge Fund risk team at Goldman Sachs saved the bank upwards of a billion dollars in exposure in the Archegos case, and more broadly, risk teams are worth their weight in gold when compared to avoided losses accrued over a year period. Equally, a smaller risk team that costs less for a franchise to maintain but is under strain from a headcount perspective responds slower to crisis, resulting in larger financial implications in the long run. We expect that the legacy of Archegos and other key risk events should result in higher compensation packages across the board, though this trend will be mediated by technological developments and global financial health.

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Risk has emerged as one of the most important business functions across complex financial services institutions. While many of our competitors now cover the sector, our differentiators are our depth of experience, thorough insights, and proven ability to deliver on otherwise hard-to-find talent.