November 2006

Regulation is more complex, both within and across countries. Technology has been both the salvation and curse, making it possible to coordinate complex activities around the globe, while also becoming a major source of vulnerability. To address these issues, the Wharton School and the Risk Management Association (RMA) are launching the Advanced Risk Management Program, an executive education program focused on managing banking risks, to be offered in February 2007.

Bank executives face many new risks in a world of globalization, changing regulations and new technologies, but also have access to new tools for more effective risk management.

"The technology to help you measure and manage risk has increased in sophistication markedly since the late 1970s," said Professor Richard Herring, Jacob Safra Professor of International Banking at Wharton and academic director of The Advanced Risk Management Program. "Financial technology has kept pace with the growth of information technology so that managers have an ever-growing array of options to slice, dice, and redistribute risk. These tools enable managers to measure, manage and control their risks with much greater precision, but if they are not properly used they can inflict a lot of harm."

Well-managed banks have good methodologies for identifying, measuring and managing risks. They have processes for learning from their past experiences, such as analyzing data on the outcomes of loans. "A well-managed bank has a crystal clear idea of the cost of equity capital and how much shareholders are demanding that they earn," Herring said.

Banks already have seen the impact of new tools to improve the management of financial risks. "All of the increase in resources devoted to managing risks has led to better outcomes in the banking industry," Herring said. "Banks have done a much better job of handling the risks. The key evidence is the fact that when we experienced a stock market crash and a recession at the turn of millennium, bank profits held up very well." Despite the bursting of the tech bubble and the significant decline in share values, banks were better capitalized, had lower losses and better profitability.

But some banks still need to increase their sophistication in addressing risks, particularly in the light of changing regulations. "For some banks, it will require a remarkable transformation in the rigor with which they measure and manage risks," Herring said. "It is a huge training challenge as banks get up to speed. There has been an increase in demand for people who understand these issues."

To provide this education, the Wharton School joined with the Risk Management Association to establish a new program for banking executives. While there are many, sharply focused programs aimed at the "rocket scientists" who build models of risks, there is little education to prepare managers to understand and manage risks at a broader level. The new Advanced Risk Management Program offers an understanding of both the power of new tools and approaches as well as the changing regulatory environment. The program combines insights from research and practice. "This is an area where the gap between theory and practice is narrow," Herring said.