Build a framework for risk management.

• Author: Vojta, George J.
• Position: Risk Management

The worst thing in today's business climate is not knowing the risks embedded in your business. The next worst thing is not being able to reposition once risk is exposed.

In our current business environment, characterized by globalization, deregulation, and heightened competition, volatility is our constant challenge. With greater volatility, of course, comes greater risk--and greater opportunity. But to realize the opportunities offered by risk, it must be understood and, most importantly, managed at all levels of the organization.

A net risk is embedded at every level of a business--at the strategic level, the operating level, and the financial level. Many companies have instituted risk management programs on the financial level, but few have developed the discipline of examining net risk on the strategic and operating levels of their organizations. Through our own experience in an industry that has gone through dramatic change within the last 20 years, Bankers Trust has developed a framework for risk management that allows us to see that the world is, in fact, organizable. And we are convinced that a framework for risk management is going to be the key perspective for senior leadership in businesses all over the world.

TRAUMA SPURS GROWTH

In the 1970s, as a result of the recession that followed the first oil shock, banks in the U.S. had to face up to the reality of an increasingly deregulated industry and the intense competition that resulted from deregulation. With the emergence of money market funds and other nonbank players and the advent of commercial paper and more efficient capital markets, banks lost many of their best customers.

Bankers Trust was no exception. We realized that we had to make some dramatic changes if we were to continue to prosper. So we undertook a rigorous analysis of the competitive environment, of the risks and volatilities we faced, and we initiated a transformation of our organization that continues to this day. We made the strategic decision to get out of the retail banking business--in the late 1970s, when it was still relatively profitable and saleable--and to direct our efforts toward wholesale banking, focusing our businesses on major corporations, financial institutions, governments, and high net worth individuals worldwide. Today, we have evolved from a money center bank into a global merchant bank.

If you look at Bankers Trust today, you will find that the loan account of the bank is now only 25 percent of total earning assets (vs. over 70 percent in the 1970s), while liquid assets, carried mostly at fair market values, make up over two-thirds. With our current positioning, if adversity or volatility affects our assets, we can reposition...