Q3.1 2024
If we were to believe the red-tops during the latter stages of 2008, credit risk management measures were first implemented within the banking sphere only in the shattering aftermath of the Global Financial Crash. In reality, the antebellum years were still regulated – Glass-Steagall arrived in the 1930s, RAROC was introduced as a concept in the 1970s, and even the first two iterations in the trilogy of the Basel framework came in the immediate decade preceding the crash (Episode II: default risk strikes back?). That being said, it is undeniable that the life-threatening rupture of the financial system during the GFC drastically shifted attention to credit risk functions within large Financial Institutions. So, how are credit teams shaping up after almost 15 years in the spotlight? And what difficulties do they face today when it comes to hiring?
Burgeoning Regulatory Demand:
Well documented are the regulatory demands on lending since the GFC: the Dodd-Frank act, for instance, requires implementation of regulatory measures around capital adequacy, risk reporting, consumer protection, stress testing and derivatives regulation. Less discussed is the impact these regulations have had on credit teams – complex compliance buffers deal approval, forcing an increase in risk team headcount to maintain output levels, which in turn imparts pressure onto team budgets.
MDs are presented with another challenge: the proposition of dissatisfied analysts. We see an increasing number of analysts who perceive their time to be snatched away by the regulatory aspects of their role. This can leave their sought-after skill sets untapped, and in some cases, atrophying. As a consequence, CRM teams fall under threat from poaching on both fronts: internal and external.
Demanding Data:
Banks and financial institutions are heavily reliant on high-quantity data processing to detect and assess potential risks and make informed credit decisions. With such a high quantity of data comes some key challenges surrounding data governance, data silos, and legacy systems. Moving beyond these challenges, large volumes of data (be it investor newsletters/presentations, DDQs or global market data) are pushed onto junior team members’ desks to be processed manually. These processes are often time-intensive, ultimately delaying decision-making and separating risk professionals from their unique qualities. As these tasks become quotidian, dissatisfaction festers and CRM teams see their churn rates increase.
A Dearth of Credit Risk Talent:
As credit teams diversify and 1.5 Line of Defence platforms within credit emerge, we see an increased desire for credit risk talent that exists at the confluence of technical ability and front-facing flair. With origination and risk teams growing closer, fewer opportunities exist for strictly middle office types, but the problem CRM teams face is retaining those with that front-facing verve. Such talent can be easily persuaded to swap the relative eudemonia that exists within the credit space for the seductive hedonism of origination/buy side.
This brain drain is compounded by the triangulated management structure of many CRM teams, which can bottleneck talent around the VP level. To counter-act this, CRM teams pay well, especially on fixed salary. Counter-productively though, high remuneration can result in compensation drift – where comp extends beyond the typical ranges for an individual’s title to such an extent that they struggle to market themselves for promotion at other shops, which can also lead to an eventual pivot to the buy-side.
The Recruitment Burden:
Markets in flux pose complex challenges to CRM teams on a lending basis, but volatility also encumbers CRM leaders with challenges on an internal recruitment level. Increases in lending and trading volume coming in from Origination during buoyant periods can stretch Risk thin, often driving the requirement for new hires. The resulting recruitment processes are often lengthy and congested, removing senior leaders from daily tasks and ultimately creating a backlog of work. This is a cyclical process, as the recruitment process slows further with less calendar time dedicated to it. In some cases, these internal recruitment processes endure beyond market buoyancy, especially when the typical notice period of three months is factored in.
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