This article is the second part of an interview of Walter Dolhare, a former Wells Fargo executive who held various leadership roles including President and CEO of Wells Fargo Securities and Co-Head of the Corporate and Investment Bank (CIB). Walter is a new Member of the Board of ActiveViam. Read the first part: Interview with Walter Dolhare, Member of the Board, Part I .
What’s the role of regulation in shaping workflows and IT decisions?
Regulators themselves are prescribers of course, but, individually, they’re not really disruptive in the sense that everybody is on the same level with them. More challenges appear when your organization works across different jurisdictions. There tends to be a sort of “arms race” at times between regulators who want to show themselves to be the strictest, but even without that they often have taken different approaches to the same issues. Working across different jurisdictions means having more systems to reconcile, and some countries will not be able to use the same tools as everyone else because they don’t meet their particular regulator’s requirements. In those cases, the best thing is to create a customized add-on, rather than invest in a different local platform altogether.
How does this apply to FRTB in particular?
For FRTB, I think the industry overall is ready, though it differs from bank to bank. One thing that I feel is sometimes overlooked is how much analytics power the FRTB framework requires, especially for the Internal Models Approach (IMA). I believe some organizations who think they are ready to deliver FRTB reports have underestimated the need to fully explain them and will have a sharp awakening.
Besides FRTB, what other challenges do you anticipate for 2022?
ESG risk is top of mind everywhere, particularly climate risk. Financial institutions are peculiar in that they have to consider not just themselves but every other industry vertical they lend to, and their exposure to climate change is just starting to come into models.
To be clear, climate risk is not a new risk class, it is rather a component of other risk classes. What it means is that the challenge is not to buy another packaged solution or to create a new analysis desk to take care of it, but rather to upgrade existing tools, models and workflows to take it into account, and the challenge resides in that some of them are really not ready to do it. But if you neglect it, your decisions will not be optimal, particularly in lending, and competitors will have an edge over you. Understanding, measuring, and reporting climate risk is also increasingly becoming a regulatory expectation.
What about rising inflation and rising interest rates?
I don’t think interest rates will be such a big issue, because I expect regulators will proceed incrementally. What might be a challenge down the line is not really technology, but rather people and culture. We’ve lived through almost 15 years of quantitative easing, and everyone will need to re-learn how to operate with more “normal” rates of inflation and interest rates, and act accordingly. A good approach is to staff teams with analysts from different backgrounds, including some who have experienced high-inflation environments in the past.
Everyone lived through Covid for nearly two years. It taught people and businesses to adapt quickly and to thrive in uncertain circumstances. I believe that more than anything else, it set the industry up well for the next period.
You mention diversity, you’ve been an advocate for diversity your whole career, what benefits does it bring in finance?
There are many different dimensions of diversity, the most common and talked about are race and gender. Ultimately what’s most important is diversity of thought. What I always emphasized is the need to have a diversity of professional backgrounds and experiences, including having a team made of people who come from different cultural backgrounds and possess different dimensions of diversity. In addition, having worked in different asset classes and different geographies before is a huge asset because it ensures that if an unexpected situation arises, someone on the team will likely have the experience and the tools to deal with it.
Risk itself has a huge variety of attributes and over my tenure I’ve seen how much they continue to grow and change. Risk analysis teams must match that diversity to make the best decisions.