How to get a risk management job in the finance industry

• Risk managers try to prevent banks from taking the kinds of unreasonable risks that can create large losses and threaten the integrity of the institution.
• Risk jobs vary depending upon the area of risk you work in.
• Some risk managers need to be highly mathematical and able to create models that can calculate potential losses from a set of circumstances.

What are risk management jobs in financial services?

If you work in risk in the financial services industry, your role will be to help prevent your employer from becoming unstuck by virtue of any of the things that could cause a shock to the institution. There are for broad kinds of risk you need to be aware of: market risk, credit risk, operational risk, and liquidity risk.

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What are market risk mangement jobs?

Market risk reflects the risk of loss from changes in market prices, yields, and volatilities and correlations. At its heart, market risk provides a gauge of sensitivity of P&L, and ultimately capital, to changes in market conditions. Its core responsibility is to identify, measure, monitor, and control exposure to these risks in accordance with an institution’s size, risk capacity, and overall risk appetite and to report on these exposures to senior management and the board.[1]  The fundamental role of market risk management is to ensure that management is fully informed about the risk profile of the bank and to protect the bank against unacceptably large losses resulting from concentration of risks

What are credit risk management jobs?

Credit risk is the potential that a borrower or counterparty – a person or entity that owes money - will fail to meet their payment obligations. The goal of a credit risk management function is to optimize return by keeping a company’s credit risk exposure within predefined credit limits. These are usually calculated at the issuer, currency, industry, country, and regional level. This risk is managed at both the macro and micro level, with intense scrutiny of potential and actual borrowers, but also of exposure analysis at various levels of aggregation. About half of all bank assets in the US consist of loans, making them the largest single source of credit risk, but banks also incur credit risk in their investment portfolios. This is usually in the form of bonds and in their trading book, but also through counterparty and settlement risk (ie. the risk that a trade doesn’t settle properly). In addition, banks also take credit risk via guaranties and letters of credit. [2]

What are operational risk management jobs?

The Bank of International Settlements defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or the risk of loss from external events, typically including legal risk, but excluding strategic and reputational risk. Some of these risks result in actual financial losses, while others lead to inefficiencies, lost opportunities, and other indirect costs.  In essence, operational risk captures those direct and indirect risks not captured in the market or credit risk. If you work in operational risk, your role will be focused on the maintenance of an effective control environment within a firm.[3]

What are liquidity risk management jobs?

Liquidity risk is a different type of risk altogether, and is one which has come under increasing regulatory scrutiny since the 2008 financial crisis.  Liquidity risk gauges an organization’s ability to meet its immediate cash obligations to its creditors. It sounds simple, but it’s not.  Ready cash in a financial institution comes from bank balances, the capacity to borrow, and the ability to sell (or “liquidate”) assets without suffering severe losses. Meanwhile, obligations incurred include loan and bond interest and principal, contractual obligations to lend, and derivative securities commitments. Failure to meet any of these obligations can have severe repercussions, up to and including bankruptcy. The liquidity risk function in a  bank measures and monitors sources of uses of cash, including both those of a fixed nature and those driven by markets and client behavior.

So, what are the career paths in risk management?

Career paths in Market Risk often start out in desk coverage or in the reporting function.  The reporting function conveys to management and the board the risks associated with trading activity, decomposing them into their core equity, commodity, interest rate, foreign exchange, and volatility components.  They aggregate risks by type and compare them with the firm’s risk limits, ensuring that risk-taking is within management’s risk appetite. They also calculate statistical measure of risk, including Value-at-risk and run stress tests to ensure capital adequacy. This reporting is done on both a regularly scheduled and ad-hoc basis   Market risk professionals with quantitative backgrounds also move into model risk and quantitative audit roles.

Desk coverage is the process by which teams of risk management staff are assigned cover specific trading desks.  These teams are co-located with the trading desks and are actively involved in the new products process, model implementation, regulatory and management reporting, and limits monitoring.  Staff in these areas are expected to monito market conditions closely and be able to articulate clearly what the risks are in any particular area.  They are also expected to understand and leverage institutional IT infrastructure to get information. Additionally, Market Risk Management produces periodic Market Risk-specific reports and daily limit utilization reports for each business owner.

Credit risk careers are always closely linked with the credit risk analysis of products, markets, issuers and counterparties.  Thus, credit risk analysts usually start out by doing financial statement analysis in the case of issuer credit risk.  For counterparty credit risk, new analysts focus on how expected exposure is measured, aggregated, and reported.

Many credit risk professionals stay in the credit risk function for extended periods in their careers.  They often manage groups of credit analysts and become specialists in particular areas like media, energy, or hospitality.  This specialization requires them to become experts in their fields both with respect to the balance sheets of the companies involved and in the fundamentals of the business itself. From there, some move on to manage credit exposure in hedge, pension and mutual funds.  Others can apply their knowledge of how cash moves through a business in the private equity business, where financial statement analysis is a core competency.

Operational risk as a career path has only really existed since the early 2000s.  The people engaged in operational risk since it became a Basel focal point are thus career trailblazers, establishing new career paths. Currently, many op risk professionals are expanding into cyber risk management, environmental/climate risk management.  In these new areas of interest, the skills associated with event risk identification and event reporting are highly valued, as is the development of risk appetite frameworks.  Still others are taking operational risk skills learned in banking and applying them elsewhere in financial services as the importance of operational risk management becomes recognized on the buy side.

Liquidity risk management as a discipline is also relatively new, although banks have been managing liquidity for years. New analysts here tend to focus on particular areas within liquidity risk like balance sheet management and analysis, repo/reverse markets, or regulatory reporting.  There is frequent movement in both directions between the bank treasury and liquidity risk management areas as the skill sets required are fungible.  Liquidity risk management skills are also readily applicable in both nonbank financial institutions and in corporations, where cash management is just as important.

What are the skills necessary to work in risk jobs in financial services?

The three key requirements are an inherent interest in the way markets and companies work, an appreciation  of the importance of process, and a core level of quantitative competency.    While many are attracted to the financial rewards of a career on finance, the primary requirement is a curiosity about companies, products and markets.  You really need to look at the markets and companies the way an entomologist studies and anthill or a beehive.  People drawn only to the financial rewards often burn out.  At a minimum, they are often less willing to devote the time and effort required for success.  If you are not naturally drawn to the markets, this may not be for you.

Process is at the heart of everything that takes place in risk management.  In order for risk to maintain its key role – to keep senior management aware of the risk profile of the firm and to prevent unacceptable concentrations of risk – business activities need to be carried out in a regular, orderly fashion in a way to which everyone involved agrees.  This is obviously easier in small organizations, but is absolutely crucial in large ones.

Quantitative competence is a must in all areas of risk management.  While there are certainly many subjective elements to risk management, its essence lies in the analysis of numbers.  Both market risk and liquidity risk are heavily dependent upon econometrics, statistics, and of course finance.  There is a great deal of on-the-job training, but having a basic background in these is very helpful.  Since rates of change are often of interest, calculus is also important. Counterparty credit risk is dependent on market conditions, thus, these skills are similarly useful there.  Issuer credit risk is more focused on financial statement analysis because these statements reflect a company’s financial health.  Thus, an understanding of basic accounting is essential.  An understanding of corporate finance and how firms manage their capital structure is also helpful.  Operational risk is essentially actuarial in nature and thus dependent on statistical concepts.

The author acknowledges the following sources:
https://www.federalreserve.gov/supervisionreg/topics/market_risk_mgmt.htm

https://www.bis.org/publ/bcbs75.htm

https://www.bis.org/publ/bcbs54.htm

https://www.auditboard.com/blog/operational-risk-management

https://www.fcic.gov/about/financial-reports/reports/2020annualreport/2020ar-final/pdf

https://www.db.com/ir/en/download/DB_Annual_Report_2017.pdf

https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/bank-supervision-process/pub-ch-bank-supervision-process.pdf