Risk Management Reports

July, 2003
Volume 30, No. 7

It sounds like an Italian cheese or a geological era, but it’s not. It’s closest to a newborn child. PRMIA is the Professional Risk Managers’ International Association, the newest organization for practitioners of the risk trade. A group of over 20 active Regional Directors and members of the Global Association of Risk Managers (GARP), unhappy with the leadership and direction of that organization and unable to make changes internally (see RMR March 2002), formed the new group in late 2001. It has grown substantially in the past two years. At the same time, perhaps because the departure of many of its members served as a catalyst, GARP itself has instituted a revival. So today we have two competitive associations representing financial risk managers around the world. Do we need two? I’ve already expressed my doubt but, as long as they agree to cooperate (both are nonprofits), there is no reason why they should not continue their parallel tracks. I am a member of and learn from both.

PRMIA (for full information, see its well-designed website www.prmia.org) now counts 6,500 plus members and 38 chapters, representing 2,400 institutions in 95 countries. Membership continues to be free. Current financing of its website and organization depends on examination fees, conference income and commercial sponsorships, the latter currently at 45% and to drop to 25% in 2004. Its financial statements are posted annually on the PRMIA website. All its leaders are member volunteers.

PRMIA offers both a certification program and regular international meetings. Its PRM (Professional Risk Manager) designation requires passing a difficult yet challenging examination. It now has 265 PRMs globally. See its website for full information, a minitest and its reading list, plus a thorough list of useful papers and publications. Its conferences cover the gamut of financial risk management: treasury risk, credit and portfolio risk, country risk analysis, corporate RM roundtable, performance evaluation of hedge funds, Asian Banker Summit, EU derivatives, legal risk, operational risk, geopolitical risk and an Enterprise Risk Symposium. They will take place during the next six months in such locations as Washington, Chicago, New York, New Jersey, London, Hong Kong, Madrid, Paris, Singapore and Verona.

To check on PRMIA’s progress, I attended its 2003 Risk Summit, in Boston on June 9. A similar event was held earlier this year in Europe. First, I like the idea of an intense one-day event. It opened at 0850 and concluded at 1830, with a luncheon speaker. That’s efficient use of valuable time! Second, it was (almost) free of commercialism. The Summit had but one sponsor. This is a stark contrast to most other risk management events where everything seems to be for sale! I received in June a flyer from another organization promoting a November conference for which it offered, at substantial prices, the chance to plant a name on such things as tote bags, cabarets, meals, coffee breaks, a golf tournament, a welcoming bag and even a “turndown service.” That last item challenges my prurient imagination! It was pleasant to have only the PRMIA label on this event. The focus was on information and content, not on sales pitches. 

And third, the content of this day was consistently high. Its three featured speakers addressed critical issues with candor and intelligence, and its numerous panels avoided the common flaw of too lengthy “statements” and too little discussion. The dialogue and floor questions were probing and often at odds with speakers’ opinions. The lead speaker was R. Glenn Hubbard, the former Chairman of the Council of Economic Advisors for the Executive Branch of the US Government. Hubbard discussed four “key policy risks” for the US: the timing of the recovery in business investment, the volatility in oil prices, the potential for a trade fall-out (a spillover from the Iraq war), and reform failures (so far) in Germany and Japan. He called two other issues “red herring risks:” the over-concern about currency valuation and the rising US budget deficit. He suggested that the latter is still well within an acceptable percentage of GDP, although the deficits in entitlement programs are problems. Hubbard sees “enormous resiliency in the US private sector,” leading to his belief that “the outlook for long-term growth in the US is very good.” He cautioned, however, that while “risks are basic features of a dynamic economy,” the recent erosion of trust in the private sector could lead to “demonizing risk” unnecessarily. Regulation should avoid protectionism of every sort and emphasize “transparency” and disclosure rather than excessive rules and regulations. He called for continued support of the “business judgment” rule, under which managers should be immune from lawsuit and governmental interference when an honest business decision fails to produce its expected benefits. 

The other featured speakers were Eliot Spitzer, the Attorney General of the State of New York, and Richard Sandor, the Chairman and CEO of the new Chicago Climate Exchange. Spitzer focused on federalism and governance. While the US has undergone a period of devolution of centralized federal power to state and local governments, a devolution that he acknowledged he and his fellow AGs in the states have eagerly used to their advantage, he believes that some of these powers should be returned to Washington. The issue of governance has, he argued, “touched every sector of our society.” He argued that it began with Richard Nixon’s attempt to create an “imperial presidency.” It then spread into the private sector in the 1990s, resulting in the most recent sordid examples of runaway executives and complacent boards. He suggested that one means of redressing the balance might be to grant greater power to institutional investors, permitting them more voice and power in corporate boardrooms. Dr. Sandor updated the status of the new Chicago Climate Exchange, his global venture in trading carbon pollution credits. I heard him speak on the same subject at conferences in February 2000 and 2002 in New York (see RMR March 2000 and March 2002). This voluntary greenhouse-gas trading program holds significant promise for long-term reductions in emissions with limited governmental involvement. For more information, go to www.chicagoclimateexchange.com. It’s an exciting idea and one to watch closely in the next few years.

I attended four panel discussion on such subjects as “Using Risk Management to Improve Competitive Advantage,” “Contrasting the Risk Profile and Appetite of Different Business,” “Thriving in the Current Regulatory Environment,” “Keeping Up with the Evolving Role of Credit Risk Management,” and “ Reputational Risk: How Can Ethics and Corporate Culture Help?” Each featured an active and vocal moderator who kept comments brief and encouraged floor questions. One panelist argued that his role was to “help others take better risks,” a sign that this group is not mired in the mudhole of downside risk. One questioner asked if the panelists had seen, over the past few years, a distinct migration of credit risk from banks to insurance companies. They confirmed this shift, suggesting that these two industries assess credit risk benefits and harms in different ways! The regulatory group discussed in depth the current Basel II proposals, still under review. They agreed that, while the new accord increases regulatory complexity, this is inevitable because of the globalization of business and the increasing sophistication of econometric modeling.

Altogether the PRMIA Risk Summit 2003 was an intellectually challenging day. I’ll add one last comment. Of the 38 speakers, only eight represented vendors. This ratio of 21% is the lowest I’ve seen at any risk management conference in the past decade! Here, at last, is a group of practitioners who speak for themselves! 

Altogether the PRMIA Risk Summit 2003 was an intellectually challenging day. I’ll add one last comment. Of the 38 speakers, only eight represented vendors. This ratio of 21% is the lowest I’ve seen at any risk management conference in the past decade! Here, at last, is a group of practitioners who speak for themselves!

Thomas C. Wilson, “Overcoming the Hurdle: Integrating the Shareholder/Debtholder-Perspectives,” paper presented at the 2003 PRMIA Risk Summit

Copyright 2003, by H. Felix Kloman and Seawrack Press, Inc.

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