Page 44 - Risk Management in current scenario

between remuneration and performance, and include measurable
standards that emphasize the long run interests of the company. These
things did not happen and contributed in the making of GFC.

It is usual in most companies (banks and non-banks) that the equity
component in compensation (either in shares or options) increases with
seniority. One study for European banks indicated that in 2006, the fixed
salary accounted for 24 per cent of CEO remuneration, annual cash
bonuses for 36 per cent and long term incentive awards for 40 per cent.
By contrast, one study of six US financial institutions found that top
executive salaries averaged only 4- 6 per cent of total compensation with
stock related compensation.

Role of CRO
Risk Management has been successfully where the CRO reports directly
to the CEO or where the CRO has a seat on the board or management
committee. Some banks make it a practice for the CRO to report regularly
to the full board to review risk issues and exposures, as well as more
frequently to the risk committee.

Ignoring Liquidity Warning
The turmoil was played by liquidity risk which led to the collapse of both
Bear Stearns and Northern Rock. Both felt that the risk of liquidity drying
up was not foreseen and moreover that they had adequate capital.
However, the warning signs were clear during the first quarter of 2007:
the directors of Northern Rock acknowledged that they had read the Bank
of England's Financial Stability Report and a FSA's report which both drew
explicit attention to liquidity risks yet no adequate emergency lending
lines were put in place. Countrywide of the US had a similar business
model but had put in place emergency credit lines at some cost to them.
The Institute of International Finance (2007), representing the world's
major banks, already drew attention to the need to improve liquidity risk
management in March 2007, with their group of senior staff from banks

42 | Risk Management in Current Scenario