'I HAVE A DECIDED
AVERSION TO RISK...'
16
talking heads
What'S NewS Issue 8 August/September 1997
The fact that Robert Armstrong has a distinct lack of
appetite for risk does not detract from his equally distinct
appetite to control and measure it. 'As bankers, we like risk,'
he says. 'It is our business. We look for it because we want to
see if we can manage it better than the next person.' RI's
global market risk manager on how more stringent checks
and balances can create more room to manoeuvre.
If you have been thinking risk
management is one of the buzz
words of the 1990s, you would
not be altogether wrong. But,
explains Robert Armstrong who
came to the bank via KPMG
last year, this is not merely a fad
dreamt up by management
consultants, but a crucial
element of banking that is
definitely here to stay. '1 think
there are two contributory
factors in the growth of risk
management,' he says. 'One is
undoubtedly the growth in
expertise, starting with the US
banks. Over the past few years,
I've certainly seen a natural
evolution from very crude to
very sophisticated measures and
methodologies. We're getting
into it in Europe now, but the
US definitely blazed the trail.'
It was Armstrong's 10-year
tenure with an American bank -
in both front and back offices -
which sparked his awareness of
just how useful sound risk
management can be. 'Back in
1989, the Bank of England
issued a report that we called
AORICS for short - Accounting
and Other Records in Internal
Control Systems. At the time it
seemed more like banking folk
wisdom rather than a
sophisticated guideline,' he
laughs. But it was clearly the
writing on the wall. 'Shortly
afterwards, the OEDC countries
got together and decided that
banks had to put capital against
both credit and market risk and
that all regulators should use
the same measurement
methodology to figure out how
much capital there should be.
Then Basel indicated that
market risk would become a
factor in BIS ratios. We then
saw a convergence of regulatory
requirements and best practice
in the run up to D-Day, 1
January 1998, when the
standards laid down by the
regulators come into force.'
Armstrong discovered his
distinct aversion to risk when
working as a corporate dealer.
'Although an intermediary
between cliënt and trader, I still
took some risks of my own and
found I really did not like it.
There are people in the bank
who are capable of making a lot
of money one day, losing money
the next, but who still sleep at
night, come in the next day and
do it all again. We need people
like that. And if you're going to
allow these people the space to
do there job, then risk
management and control is
indispensible. We're in the risk
arbitrage business. The
introduction of derivatives was
very significant. They enabled
bankers to trade market risk
without the accompanying
credit risks. That was a great
freedom because you can now
flip open and close positions
without any balance sheet
impact. And it was this lack of
transparency, the fact that
balance sheets and reported
financial statements no longer
gave any clue as to what risk the
bank was running, that led to
the new regulatory regime.'
He laughs again as he offers an
analogy that clearly appeals to
him: 'It's a bit like beer and
whiskey,' he says. 'If all you give
a man to drink is beer, then he
can only get so drunk because
there are physical constraints on
consumption. But if you give
whiskey, then you have to
introducé some measures and
controls because he'11 get a lot
drunker a lot quicker on
'shorts'. We're currently in the
'shorts' era. What we have to do
is prove to our management
that the old, crude measures we
used to use overestimated risk
and that the new ones give a
more accurate measure. The
latter then allows you to do
more business within the same
Robert Armstrong: as bankers we like risk...'
risk appetite of management. It
means that from one perspecti\^|
you're taking more risk, but
because you better understand
what you're doing, it is not as
risky.'
Armstrong's aversion to risk
appears inherent to his
personality - as a long-time
supporter of Newcastle United,
the north-east of England club
may have had its ups and
downs, but is currently one of
the country's top teams. Bom
and raised on a hill farm in this
rugged region of the UK,
Armstrong attended boarding
school in Scotland. 'It gave me a
life-time love of the countryside
there,' he says, 'especially the
western highlands and the
islands.' As we go to press, he
will be returning to a boarding
school, though not his alma
mater, in the company of
around 90 kids. A committed
Christian, almost all of his free
time is devoted to a whole range
of church-related and social
work. 'My wife Susan works
almost full-time for the church
on a voluntary basis,' he
explains, 'our children, Eloise
and Daniël, have both just
finished university and are just
as committed. Our daughter is
taking a year off and will be
doing voluntary work until she
decides on her further career.'
At present, Robert and Susan
Armstrong are more concerned
with the 90 children who will
soon be under their - albeit
temporary - care. The
youngsters aged between 11 and
16 come from varied
backgrounds and will probably
have little awareness of the
millions that our risk manager
deals with on a daily basis. They
will be interested in more
immediate finances. As the
treasurer for BASH - bible and
activity sport holidays - Robert
Armstrong will have the crucial
task of managing their pocket-
money. 'This is very complex
stuff involving sophisticated
tools, such as a cash box and a A
notebook,' he grins. In view of™
his fascination with the
measurement and control of
money, they couldn't be in
better hands.
