eFinancialCareers

The professionals who stop bankers acting too rashly.

Voice of caution or spoilsport? Risk managers act as a restraining influence on a bank's risky activities. They ensure a bank is not over-exposed to plummeting stock markets, or stop huge loans being made to companies on the verge of bankruptcy. They also ensure business continues as normal in the event of operational problems, such as computer system failure or disasters such as a hurricane or terrorist attack.

The risks faced by financial institutions come in several forms, including:

• Market risk: the risk that a whole group of traded financial products (for example stocks, bonds or commodities) falls in value simultaneously because of outside events, such as rising oil prices or terrorist bombs. Also known as 'systemic risk'.
• Credit risk: the risk that a particular company or an individual will default on their obligation to repay their debts.
• Operational risk: the risk that something might go wrong in the day-to-day running of the bank – from computer failures and floods to employee fraud.
• Reputational risk: the risk that something will happen to damage a bank's name, such as a high-profile court case against it or damage by association with a client who has done something wrong; it is sometimes considered a sub-sector of operational risk.

Trends

Risk has become increasingly complicated thanks to an explosion in the use of credit derivative products – in the first half of 2006, the value of credit default swaps outstanding globally rose 50% to £13 trillion.

Using derivative products such as credit default swaps (CDS), banks are able to quantify the risk that a client might default on a loan by selling it on – buyers purchase the right to receive repayments on the loan, but if the borrower defaults, the CDS holder will itself have to pay the amount outstanding back to the lender.

Growth in the use of credit derivatives has led to claims that global financial markets are now less susceptible to risks such as the implosion of a major hedge fund. But sceptics say the system remains as precarious as ever and that many of the buyers of credit derivative products don't understand the riskiness of their purchases.

Following the failure of Amaranth, a US hedge fund which lost $6.5bn on bad bets on natural gas prices in 2006, the system seemed to bear up. But with several banks said to be nursing large losses, it also showed the need to properly assess the risk of doing business with some trading partners.

Roles and career paths

Market risk specialists use mathematical 'value at risk' models to work out the maximum amount of money the bank would lose in the case of an extreme event, or chain of events, within a particular timeframe. They also work closely with traders to calculate the risk associated with specific trading transactions and typically sit on, or close to, the trading floor.

Credit risk specialists scrutinise company balance sheets and meet company directors in order to determine the organisation's financial health. As well as looking at a company's profit and loss accounts, they analyse how a particular transaction affects the company's solvency.

Operational risk experts review the likelihood of particularly risky events taking place and formulate plans in case they do. If you work in operational risk, you could find yourself doing anything from ensuring the computer backup systems work properly to conducting post-mortems on how well the bank dealt with disastrous events in the past.

Reputational risk specialists endeavour to manage a bank's image. Few banks employ reputational risk specialists per se: the role is typically dealt with by the public relations department, the human resources department and/or the legal team.

If you want to follow a career in risk management, it's a good idea to join a bank's graduate training scheme. At some banks, risk training is covered by the IT or operations department. Deutsche Bank, Dresdner Kleinwort and UBS are among the banks that offer risk-specific training to graduates.

Pay

Pay for risk professionals rises in relation to their proximity to the trading floor and their involvement with complex derivative products. According recruitment firm Morgan McKinley, a junior risk professional working on a quantitative finance (read complex derivatives) team can command over 60% more than his or her counterpart in basic credit risk.

Skills

You'll need strong mathematical skills and a cool head, according to Sally Whitman, head of specialist resourcing at Deutsche Bank. "You'll need to be able to come to conclusions under pressure quickly and accurately," she says.

Above-average common sense and strong communication skills are other key attributes, agrees Julian Shaw, head of risk management and quantitative research at Permal Investment Management. "You need to have good applied maths skills and an understanding of differential equations as well as financial modelling skills. But it's not just about solving the problem. We look for people who can identify the problem from the confusion which surrounds the business decision, model it and then improve the decision-making around it," he adds.

Adrian Marples, risk management specialist at recruitment firm Sheffield Haworth, says market risk specialists often have a first-class degree in physics or an MA in mathematics. By comparison, he says: "Credit risk people need to be inquisitive and able to extract information from clients about their strategy and financial position."

"If you are looking to start a career within a more technical area, market risk could be the choice. Generally, banks will be looking for strong academics (2.1 or above) followed by a BSc and MSc in a numerate subject," adds Craig McNicol, a consultant on the risk management desk at recruiter Joslin Rowe.