The recent departures of executives overseeing risk at several top banks burned by writedowns and losses suggests that more heads are likely to roll as the ongoing credit crunch roils on.
Over the past week, both
replaced their heads of risk management.
Observers say that they expect more chief risk officers and chief credit officers -- more commonly seen at commercial banks -- to leave as the deterioration in the housing and mortgage markets continues to play out, most notably resulting in lower earnings and higher credit losses at the banks.
"The role internally has clearly grown in importance," says Terry McEvoy, an analyst at Oppenheimer. "They will be under further scrutiny and that the probability of individuals being asked to leave companies will grow as well."
Citi and Nat City were prominent among the banks and brokerages that have taken a beating this year as the mortgage crisis deepened.
Citi reported nearly $6 billion in writedowns in the third quarter as a result of its exposure to leveraged loan commitments, subprime mortgages and fixed-income trading, while its credit costs jumped by $3 billion. The losses also resulted in the ouster of its CEO Chuck Prince.
Nat City's third-quarter earnings plummeted by 80%, fettered by the disruption in the mortgage industry. The company, which has decided to cut its workforce by 2,500 employees -- most of which will come from mortgage-related positions -- said its mortgage banking business posted a loss of $152 million.
Nat City managed to sell its subprime lender, First Franklin, to Merrill Lynch last year before the subprime meltdown, but it still holds a significant amount of nonprime loans on its balance sheet.
While the firms did not blame outgoing risk chiefs for their troubles, they did both make high-profile changes.
Citi said its Chief Risk Officer Dave Bushnell, a 22-year veteran of the company, will "retire" at the end of the year. The New York banking titan has also formed an advisory committee of senior leaders from across the company to provide input to strengthen Citi's risk management process.
Nat City said its former Chief Risk Officer Jim Bell "elected to leave the company."
Bell is replaced by Dale Roskom, who was hired by the bank in December 2006. Roskom has served as the chief risk officer for Barclaycard UK, the credit card unit of
. He has also served in credit risk and finance roles at
Roskom will assume oversight of the Cleveland bank's corporate-wide risk management system and serve as chairman of its corporate credit policy committee and enterprise risk committee, Nat City says.
Citi's Bushnell will be replaced by Jorge Bermudez, also a longtime veteran of the company. He will be responsible for market, credit and operational risk around the world for Citi and its subsidiaries. Bermudez will report directly to Citi's acting CEO Sir Win Bischoff.
In September, two big Wall Street firms,
, also made changes to their risk management leaders.
Lehman said in September that its CFO Chris O'Meara was named as the brokerage firm's global head of risk management. He will continue reporting directly to Lehman's CEO Richard Fuld.
Merrill Lynch, where CEO Stan O'Neal was ousted after taking a whopping $8 billion in third-quarter writedowns, promoted Ed Moriarty as its chief risk officer. Among his responsibilities are both market and credit risk management across the firm. Moriarty was previously the firm's head of Global Credit & Commitments, responsible for managing all credit risk related to the firm's clients and counterparties.
The job description for a chief risk officer and chief credit officer has changed over the years.
"The role of the chief risk officer is to provide such good-quality information to allow line-of-business managers to make right decisions both for their line of business, as well as for shareholders so that the chief risk officer doesn't have to exercise their veto power," says Kevin Blakely, the CEO of Risk Management Association, a Philadelphia-based organization.
McEvoy says that as the banking industry experienced relatively benign credit markets, "there wasn't much to talk about" when analysts met with bank management teams. But "now it's a laundry list of questions" that sometimes take up a majority of the meetings, he says.
But potential problems occur at companies when a so-called line-of-business manager is "so powerful that they undercut the authority of the CRO," says Blakely, a former chief risk officer at
Problems can also occur if poor or insufficient information gets in the hands of the business managers making those decisions or if the managers are incented in the wrong way, like revenue growth instead of the risk/return of their businesses, he adds.
"For every chief risk officer that has failed, there is somebody else that is culpable too," Blakely says. "The
job of the chief risk officer is to try and help manage that risk, but it's the line of business that actually takes the risk."