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Effective risk management requires competent employees

Jun 17, 2014, 12:19 PM | Article By: Osman Kargbo

Hon Amadou Colley, Governor of the Central Bank of The Gambia, has stated that effective risk management requires financial institutions to have more knowledgeable employees to identify system requirements, monitor their effectiveness, and interpret model results appropriately.

Governor Colley made this statement in a keynote address he delivered yesterday at the West African Institute for Financial and Economic Management regional course on “Implementation of effective risk management and good corporate governance practices", held at the Paradise Suites Hotel in Kololi.

The five-day workshop (16 – 20 June) brought together senior central bank officials, other financial institutions’ executives, and economists from WAIFEM sub-regional member countries of Ghana, Nigeria, Liberia, Sierra Leone and The Gambia.

About six years ago, the world was caught in the web of one of the greatest and profound economic crises which, like the great depression of the 1930s, called to question the very foundation of market capitalism, Governor Colley went down memory lane, saying the consequences of the crisis was so profound that renewed thinking started to emerge on the relevance or otherwise of free market economic doctrine.

However, there is the general consensus among economic and financial experts that the crisis was caused mainly by three major failures, he noted, outlining them as regulatory and supervisory failure in advanced economies; failure in risk management in the private financial institutions; and failure in market discipline and mechanisms.

Specifically these failures were, in turn, attributed to poor corporate governance and lack of robust risk management frameworks, he added, saying the recent financial crisis has drawn global attention to the existing system of risk management and the need to re-structure the global financial architecture given the inherent interconnectedness.

The CBG Governor stated further: “The main lesson derived from the crisis and ERM literature is that concerted and coordinated efforts are required to manage risk.

”In particular, effective risk management requires financial institutions to have more knowledgeable employees to identify system requirements, monitor their effectiveness, and interpret model results appropriately.”

He also remarked on financial sector reforms in the sub-region, saying it had led to the emergence of large and complex banking organizations.

“These institutions are likely to have significant and off-balance sheet risk exposures,” he noted. “Thus, there is a need for the development of risk management frameworks commensurate with the risk profiles of specific institutions.”

On this note, the CBG Governor tasked the participants to take interest in developing effective risk management guidelines for implementation by their respective institutions as they proceed on their careers.

Another issue brought to the fore by the crisis, Hon. Colley recalled, was excessive remuneration which “no doubt was partly responsible for the excessive risk-taking.”  

Compensation incentives should not only focus on short-term gains, but should take cognizance of long-term profitability, he noted, saying addressing these “perverse incentives” is traditionally the responsibility of financial institutions.

“Given that this approach has not worked, it is critical that regulators provide guidance through the requirements of good corporate governance principles,” he said.

Accordingly, he states, corporate governance refers to the rules, procedures, or laws by which businesses are operated, regulated and controlled.

The CBG Governor reiterated that all financial institutions need sound risk management and good corporate governance practices. 

In his opening remarks on behalf of WAIFEM Director General, WAIFEM’s Director of Financial Sector Management Ousman Sowe says risk is an inherent feature of human behavior, which can only be managed.

“Managing risk is essential for a rational allocation of resources among competing investment projects,” he said.

The course, was designed to upgrade the knowledge and skills of participants in the assessment and management of financial risk as well as enhancing their understanding of the principles of good corporate governance  practices, covered such broad themes as general overview of risk in the financial system; types of risks in the banking sector; instituting a risk management framework, tools and techniques; credit risk measurement and management techniques; operational risk measurement and management techniques; commercial bank risk management: analysis of the process; risk management and bank failure: a case study; elements of good corporate governance; corporate governance and global financial crisis; implementation of good corporate governance; and corporate governance practice in money deposit banks: the Nigerian experience.