Career

Policing Risky Business

The Economic Times; Date: 21-Feb-05

Risk is the underlying given in any business transaction. Increasingly, firms are looking for professionals who can analyse risk and help them manage it. Mangesh Sakharam Ghogre profiles the financial risk analyst.

A basic finance concept is that higher returns invite higher risks. Corporations and financial institutions busy their resources in fetching higher returns. But, have you ever wondered who takes care of the higher risks? That’s the job of a risk analyst.

Typically, a financial risk analyst gathers information about the various investment opportunities, determines the sources of all financial risks, measures the risk involved and uses the analysis to manage risks related to investment decisions. Thus, risk analysts ‘manage’ risk. Risk, as they say, can never be eliminated.

But why do we need to manage risk? Of the trends in financial markets that have spawned modern risk management practices, volatility in the financial markets, globalisation and financial innovation have been the major driving forces. Add to this list financial disasters like Barings and Orange County and the need for a risk analyst looks all the more obvious.

So how does one become a risk analyst? For starters, one needs to be an MBA, with finance, from a top business school or a chartered accountant. Though engineers and science graduates are preferred choices, risk analysts may also have postgraduate degrees in economics, mathematics, accountancy, law and statistics. Most risk professionals move on to get further accreditation like the Chartered Financial Analyst (accorded by AIMR, USA) or the Financial Risk Manager certification (accorded by the Global Association of Risk Professionals). Excellent research, analytical and decision-making abilities as well as polished communication and report writing skills are necessary to make a mark in this field. Companies look for well-informed ‘opinion makers’ who are conversant with an amazing variety of topics — ranging from practical knowledge of the financial markets to derivatives pricing, spreadsheet programming and statistics. So do get your variance and covariance correct.

Although a risk analyst in India could aspire to work in any of the specific risk fields, specialisation in credit risk and market risk is more prevalent. (See box for different types of ‘manageable’ risks)

The job of a CREDIT RISK analyst essentially involves assessment of the credit quality of a client (also called an issuer or borrower). Simply put, the analyst ensures that none of the company’s clients default on their financial obligations. The crux of credit analysis lies in the analyst’s ability to analyse the financial statements of clients and form a well-informed qualitative opinion (also called taking a view), based on factors like fund-raising ability, market reputation and corporate governance practices.

Since recent financial disasters have proved the vulnerability of quantitative statements to manipulation, the view on a client’s management has taken main stage. Ratings and limit setting are some of the measures credit analysts use to classify clients as per their credit quality. Unlike market risk, which can be hedged using various financial instruments like derivatives and swaps, credit risk hedging instruments (called credit derivatives) in India are few and far between. Hence, the analyst’s judgement about the client’s credit quality can’t be far from the truth.

The job of a MARKET RISK analyst involves managing risk on a more continuous basis (courtesy volatile markets). Market risk refers to the loss arising out of a change in the price of an asset with changes in the forex markets, commodity markets, interest rates and equity markets. Expectedly, the development of various measures to manage risks in these different markets invites use of complex statistical and probabilistic concepts. The market risk analyst helps senior management to know, with a given confidence level and for a specific holding period, how much money is at risk and how much is each asset contributing towards that risk level.

Traditionally the risk management divisions of banks and financial intermediaries like mutual funds, insurance companies and primary dealers have hired risk analysts to manage their financial risks. Today’s analysts may also find employment with IT companies, especially those which specialise in the BFSI (banking, financial services and insurance) sector. Rating agencies, corporates, consultancy firms, international brokerage houses, financial market regulators and investment banks are some of the other employers who use the services of a risk analyst.

In the corporate hierarchy, the head of the risk management team directly reports to the top management. Also, to restrict and monitor the flow of sensitive information, the risk management team is kept at ‘arms length’ from the trading desk.

In developed financial markets, the financial risk-management revolution is spreading well beyond market and credit risk; thereby graduating to risk-adjusted performance measurement (RAPM) across all business units and sources of risks. Risk analysts use RAPM-based methods, like risk-adjusted return on capital (RAROC), which try to balance profits against risks.

With the Indian capital markets becoming sensitive to more and more sources of risk (read global forces) and the vibrant Indian economy stoking the risktaking appetite, the growth in demand for risk management professionals is expected to be (b)risk. THE WORLD OF RISK CREDIT RISK: The risk of financial loss arising from the counter-party to a transaction defaulting on its financial obligations under that transaction.

MARKET RISK: The loss arising out of a change in the price of an asset with changes in the forex markets, commodity markets, interest rates and equity markets. LIQUIDITY RISK: The ease with which securities could be traded in the market without losing substantial value.

OPERATIONAL RISK: The risk of direct and indirect loss resulting from failed or inadequate internal processes, people and systems or external events. LEGAL RISK: The possibility of losses due to the fact that contracts are not legally enforceable or are documented incorrectly. REPUTATION RISK: The damage, in addition to monetary losses, caused to an ongoing business of an institution due to damaged reputation. DISASTER RISK: The risk arising from disasters like earthquakes, floods, tsunamis, fires & wars. POLITICAL RISK: It arises from action taken by policymakers that significantly affects the way an organisation runs its business. COUNTRY RISK: The risk that a country is unable to fulfil its financial commitments. CURRENCY RISK: The potential loss that could be incurred on account of movement in foreign currency exchange rates.

(The author is a risk analyst with ICICI Securities. The views expressed are personal) Work Conditions

• Salary level depends on the size and type of the organisation; some offer very good benefits packages.
• Working hours typically include regular extra hours, although not weekends or shifts.
• The work is mainly office based, but can involve visiting different sites.
• Self-employment/ freelance work is a viable option on a consultancy basis. Considerable experience and expertise would be required.
• Opportunities tend to be in large towns and cities, specially financial capitals.
• There may be opportunities to work overseas, particularly if employed by large international firms.
• The job involves pressure to meet deadlines.
• Travel within a working day is frequent, though overseas travel " overnight absenses are occasional. Career Moves Progression rates and routes vary according to the type of employer. In large organisations there may be scope for development internally, eg into management roles. A typical career path in a global bank could be:
• Associate/ analyst;
• followed by vice president;
• then, risk head;
• Enterprise-wide risk officer.


Progression may require moves between organisations. Gaining additional professional qualifications may be necessary for career progression with some employers. (Bureau inputs)