As Baring Securities trader Nick Leeson proved last year, in today's highly leveraged financial markets one man's rash bets can bring down a bank. Accounting firm Coopers & Lybrand yesterday published an 89-step guide to best practice in risk management, designed to nip embryonic Nick Leesons in the bud. Laying the responsibility for a company's risk management squarely at the door of the directors, Coopers partner Roderick Chalmers said: 'Risk management needs to be driven from the top down, by the people charged with overall responsibility for running the business.' He said 'business strategy must not be developed without assessment of risk', arguing that a company's risk management techniques 'should be ahead of product development, not behind it'. Known as GARP (Generally Accepted Risk Principles), the guide is designed for banks, securities houses and insurance companies, which increasingly are dealing in complex financial products, such as derivatives. It draws on the lessons of recent horror stories. German metal trader Metallgesellschaft racked up such huge losses dealing petroleum futures in Texas that it almost went bankrupt. Orange County in the United States blew billions of dollars punting on interest rate derivatives, totally wrecking the state budget and causing the closure of hospitals and schools. Japanese bank Daiwa is still investigating how one trader made and concealed losses in New York. And, of course, Leeson - who is in jail in Singapore while the directors of Barings have been banned from working in London. Coopers partner Robert Grome said: 'One thing most of these cases have in common is that the problems were caused a long way from home. But a little outpost could be a time-bomb.' The cases share another similarity, according to Mr Chalmers. 'They demonstrate that the managers of the business did not understand the products they were dealing in.' Mr Chalmers believes the 89 principles can be used by all managers as a checklist. First, business strategy and operations must be linked to risk management objectives. Second, companies must monitor, measure and evaluate risk on a daily basis. Third, companies must use effective measurement and reporting techniques to ensure businesses are being run in accordance with overall strategic goals. Fourth, secure operational controls must be in place. Fifth, accurate and timely information is vital.
