LONDON, 5 April 2004 — Controlling and managing risks is key to the success of a financial institution and the evolving nature of risks, in an era of rapid change, is posing increasingly complex challenges to risk managers all over the world.

In a post/911 and post Enron and Worldcom era, risk management, especially in the global and institutional financial and corporate systems, has inevitably assumed priority worldwide. This has been driven by the Group of Seven (G-7) industrialized countries, and international bodies such as the OECD (Organization for Economic Cooperation and Development), the IMF (International Monetary Fund), the Bank for International Settlements (BIS) in Basel, FATF (Financial Action Task Force), and the International Accounting Standards. They usually reacting to events, as opposed to initiating policies.

Indeed, one of the core issues in the new Basel II Accord, which will set the revised rules for global banking, is risk management standards. Basel II is still a few years from completion in 2006 or 2007, but the process of consultations has been well under way for the last few years.

Finance and risk are inseparable. For both the institution and the investor, risk always carries a cost — potentially a reward or a loss.

Indeed, financial engineers have created a whole host of products and discretionary portfolios, based on a varying risk-reward profile. The basic rule is that the higher the risk, the higher the reward.

They also continue to devise new forms of risk, which inevitably incurs further cost. In recent years, corporate governance risks, currency risks (especially in developing countries where the currencies are usually weak against the main international currencies such as the US dollar, the euro, the yen, and sterling); compliance risks; and even management risks have gained prominence, led by a host of events and developments.

There are various types of risks; country risk; political risk; institutional risk; systemic risk; force majeure; risk relating to natural events such as earthquakes, floods etc; currency risk; corporate governance risk; management risk; credit risk; compliance risk; and so on.

No region of the world can afford to ignore these developments in risk management. Not surprisingly, Bahraini banks, two weeks ago, participated in the first-ever sector-wide risk management survey among banks in the MENA (Middle East and North Africa) region. The survey was conducted by leading international audit and business advisory services firm, PricewaterhouseCoopers (PwC), in cooperation with the Bahrain Monetary Agency (BMA), with some 20 locally incorporated banks participating through a two-day workshop, organized by PwC, to elicit banks’ concerns about the risks they face.

The BMA has an established policy of engaging with industry in order to remain cognizant of any issues facing financial institutions. The survey conducted by PwC is an innovative initiative, which will identify the challenges facing banks, as well as their auditors and regulators. We wanted to encourage a frank and open dialogue with our licensees and believe that this event helped us do that,” stresses Dr. Khalid Ateeq, executive director, Banking Supervision, at the BMA.

Indeed, according to Gavin Wehlburg, the Middle East leader of PwC’s Global Risk Management Solutions service line, the survey in Bahrain is part of a planned review of risk management challenges facing the banking industry throughout the Middle East.

The MENA regions lag well-behind others in the above respect. In fact, the Bahrain survey, is based on the pioneering annual ‘Banana Skins’ surveys first conducted by PwC, along with the Center for the Study of Financial Innovation (CSFI) in London, in 1994 to assess the risks faced by banks in the UK. The ‘Banana Skins’ surveys have since become a widely watched indicator of risk patterns in the banking industry in UK.

The survey, structured within the parameters of the new Basel II Accord, targeted three key objectives: to raise the awareness and understanding of the challenges of risk management for banks; to provide anonymous information on common risks currently facing the banks; and to provide an opportunity for risk managers and senior management to come together and discuss the key risk management issues facing their business. The exercise was so successful that PwC is now planning to carry out similar surveys in various MENA countries.

It would be interesting to see what indeed the perceptions of the Bahraini bankers are of the risks they are facing.