We noted recently that some people think risk managers have been undervalued by Wall Street firms, perhaps even overlooked in the reform effort. But is that starting to change? It sure seems that way. Hedge funds, for example, are hungry for compliance and risk management experts. It looks now like demand across the entire financial services industry is likewise building, as in-house stature and salaries soar. 

Reuters says risk management executives are "no longer consigned to windowless offices below the trading floors." I'm not sure how much internal status risk managers--who many traders assume exist to tell them "no"--have risen among the actual traders. But management seems to have a new regard for the discipline. Headhunters say the top risk official at the big institutions have seen salaries double over the last two years. Some chief risk officers are said to make up to $4 million. Recall also that the former chief risk officer at Bank of America was briefly a candidate for the CEO job before the board hired Brian Moynihan. 

The rise in salary and executive stature reflects in part a marked shortage of talent. The trend now, according to Reuters, is to appoint risk officers with experience on the trading floor or sales desks. Reuters also notes that earlier this year Bank of America named former capital markets head Bruce Thompson as chief risk officer. The former chief risk officer came from a business development background. Morgan Stanley brought in former fixed-income business head Kenneth DeRegt as chief risk officer, reporting directly to the CEO. 

Some think this is mere window dressing, designed to appease regulators. But more credit rating agencies and analysts are taking a close look at a banks' risk management practices. And they still influence investors. You cannot afford not to be perceived as proactive and even aggressive. So it does seem that more banks understand that a solid, company-wide risk management program is essential to success. 

Like it or not, it was essentially good risk management that prompted Goldman Sachs to hedge certain securities in which it felt overexposed during the crisis. Despite its overall PR woes, Goldman Sachs has in fact won praise for its risk management. JPMorgan analysts have taken a look at top Wall Street banks risk management and capital practices and have judged Goldman Sachs "best in class," a benchmark for the rest of the industry. 

An essential component of risk these days revolves around IT. There's the whole separate category of IT risk management, which chief risk officers need to stay on top of. And then there's the rich panoply of tools that all risk officers need to stay abreast of activity and portfolio changes at their company. You cannot do the job without these IT-driven views. Once the regulatory picture clears up, we might see a spike in IT spending in this area. But given the higher salaries, the higher prestige and the enhanced technology, success comes down to character in some ways. 

We can only hope that as more traders become risk managers, they do not feel pressure to essentially justify the practices of the trading floor, to remain beholden to their former peers. Hopefully, they will still stand up and say "no" when the situation calls for it. - Jim